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Our monthly portfolio positioning commentary.
The economic outlook continued to improve in May, which generally supported risk assets. Investors are more optimistic despite interest rates remaining high, as the path for future interest rates cuts became clearer.
Generally, developed equity markets outperformed emerging markets. The top performing markets being the US, Europe and the UK.
On the whole, global bonds made a positive return, but there was again regional divergence, with yields having risen in Europe despite expectation of an interest rate cut in June. Yields fell in the US, which produced a positive capital return.
April was generally a disappointing month for markets as investors started to reassess the likelihood of US interest rate cuts this year. The US continues to have a robust labour market and inflation numbers remain higher than expected. This meant that most developed market equities fell in April, with the exception of the UK market, which rose. However, emerging market equities, including China, produced positive returns in April. Bond prices came under renewed pressure in the month as yields rose.
Most global equity markets had a strong start to the first quarter of 2024, on the backdrop of an improving economic picture. The US led the way, as its economy remained resilient and unlikely to enter recession, thus on course to achieve the “soft landing” policy makers have been hoping for. Furthermore, Artificial Intelligence stocks continued to boom.
However, expectations for interest rate cuts have changed from the start of the year, to the end of the quarter, with fewer cuts now expected and for these to be later in 2024. These expectations meant that global bonds yields rose, prices fell and global bonds posted negative returns.
February saw mixed performance within markets, as equities broadly delivered positive returns whilst bonds finished the month down as continued economic resilience delayed expectations of interest rate cuts by the Central Banks.
Developed market equities in particular continued their 2024 rally, being supported by the continued strength of the US economy and signs of an uptick in European economic activity. The Chinese equity market also rebounded following supportive interventions from the Chinese Government, which also benefitted broader Emerging Market Equities.
Interest rate policy continued to drive markets in January, with regional differences now being noticeable. In emerging markets, interest rates have already started to be cut, which has been positive for bonds, but not equities, which fell in January. Furthermore, emerging market equities were dragged downwards by China, where investor confidence remains weak.
In developed markets, the expectation of forthcoming interest rate cuts has been delayed by the release of robust economic data. This has led to bond yields rising and prices subsequently falling. However, unlike emerging market equities, developed market equities posted positive returns.
Equity and bond markets ended 2023 strongly, with both rising during the month. This rally was fuelled predominantly by the US Federal Reserve’s pivot to contemplating interest rate cuts in 2024. Furthermore, the US economy looks robust as inflation is falling and the labour market is weakening. This led to market commentators expecting the worlds’ largest economy to avoid recession and achieve an economic soft-landing.
Some markets did not participate in the rally, with Chinese equities negative over the period and commodity prices impacted by falling energy costs.
Chinese equities notably underperformed their regional peers and other established markets, as disappointing growth, concerns about the ailing property sector and limited central Government intervention worried investors. However, elsewhere it was a positive month for global equities, with inflation slowing and hope building that interest rates may have reached their peak. This also enable global bond markets to rally, as yields fell and prices subsequently rose.