March 2024 Investment Update
*All return in local currency terms
Overview
February continued the trend set in January, where we saw equity markets move higher, but bond markets struggling. Despite most of the attention being focused on the US market, the Japanese main market led the way, despite the yen continuing to weaken. The main focus in the US was still centred on the AI theme, with chip producer Nvidia alone producing 20% of the S&P’s return, gaining 28.6% over the month, 59.8% from the beginning of the year and 441% from the close of 2022. China managed to break its now two year long decline, as optimism grew over potential government stimulus for the troubled economy.
Bond market declines were driven by the gradual realisation that interest rate cuts in the US and elsewhere would neither happen as early as was anticipated in November/December and that the number of them would be less. In the US, the overly optimistic assumption that prevailed in markets at the start of the year has moved from a possible 5-6 cuts starting in March to 4 cuts commencing in June, as inflation appeared stickier than anticipated. However, the effect on lower risk portfolios, which tend to hold more bonds, was muted by the positive impact of the equity content as well as these portfolios continuing to hold bonds with less sensitivity to interest rates. The differing fortunes of equities and bonds should be seen as a positive development as a feature of portfolio diversification, because the last two years have witnessed a higher correlation between equities and bonds.
United States
February’s headlines were dominated by the impact of the Magnificent 7, but very much focused on those of the 7 perceived as benefitting from the effect of AI on company earnings, with both Nvidia and Meta attaining new highs, leading to Nvidia’s market value now equating to more than the size of the entire German stock market. However, as in January when we saw Tesla underperforming, February witnessed losses for both Apple and Alphabet, perhaps showing the market taking an interest in individual company earnings prospects, rather than hype. Notwithstanding this, the 7 stocks now represent nearly 30% of the index on their own, leading to many commentators worrying about the concentration of assets in a narrow range of stocks, and a bubble appearing in technology stocks particularly. This is countered by those who point to the high earnings growth numbers of these companies and suggesting these are supportive of the lofty valuations their share prices command. Regardless, it is a reminder to keep portfolios as diverse as possible by taking a global approach to portfolio construction.
On the economy front, a stronger than expected inflation number and a robust press conference from Federal Reserve chairman Jerome Powell, where he again dampened expectations of an early rate cut, upset markets mid-month. We should remember the trend is more important than individual data plots and that markets, just like inflation, tend not to perform in straight lines. Inflation has fallen quickly in the US from 8% to 3.1% - reversion closer to the 2% target is likely to be a grind and take time. Despite interest rates at 5.25% the giant US economy remains in decent shape. Consumer spending makes up around 70% of GDP and persists in robust fashion. The key being a strong labour market. However, it is the latter that is helping to keep inflation stickier than desired by the Fed.
Europe
In Europe - not to be outdone by the US - a new acronym has emerged; the ‘Granolas’ (representing GSK, Roche, ASML, Nestle, Novartis, Novo Nordisk, L’Oreal, LMVH, AstraZeneca, SAP and Sanofi). These stocks alone have delivered over 50% of the Stoxx 600’s return over the last 12 months and have naturally drawn comparisons with the Magnificent 7, due to the concentration of those returns coming from a small number of companies. However, the nature of these businesses is arguably more diverse than the Magnificent 7, but their performance does help explain the decent returns being generated from markets on a continent that currently has many countries in recession. The main driver for these companies’ performance is that these are international businesses, deriving their earnings globally and in different sectors, so are not wholly reliant on the European continent to generate these.
Despite many countries either slowing down or in recession, the European Central Bank seems reluctant to take the lead ahead of the US on reducing interest rates, with Christine Lagarde pointing towards stickier service sector inflation as a reason not to do so. Whether the economic contrast with the US can continue to justify this approach remains to be seen.
United Kingdom
As in previous months, the UK market lagged its international peers as, according to Bloomberg, some £3bn was withdrawn from UK mutual funds. This perhaps reflects the economy moving into a technical recession and expectations that the move to lower rates by the Bank of England will be more prolonged. The Bank of England have pointed to service sector inflation proving more stubborn than that seen in food, energy and goods. Service sector inflation was 6.5% higher in January while the headline consumer price inflation rate stayed at 4%. They will also be assessing any stimulatory effects coming out of the budget.
Japan
In Japan the story stayed pretty much the same as that in January, as markets pushed ahead despite the economy being in recession and no further announcement from the Bank of Japan on the prospects for abandoning yield curve control*. Inflation did nudge higher, and the Bank of Japan will be looking to see if wage increases, traditionally announced in March, keep up with this level, as it is an important metric to help keep inflation on an upward track.
Asia and Emerging Markets
China’s central bank cut its five-year mortgage rate by the largest margin ever, in an effort to bolster an economy struggling from its distressed property market and tepid consumer confidence. The People’s Bank of China lowered the five-year rate to 3.95% from 4.2%, providing some relief to homeowners. These are the central bank’s latest efforts to prop up an economy that disappointed after the great reopening post-Covid recovery never materialised. China’s National People’s Congress Standing Committee (NPCSC) met on 26 and 27 February, mainly to prepare for the NPC 2024 session in March. Agenda items will include China’s defence budget and GDP targets for the year. China also expanded the scope of its “state secrets” law, which could limit access to information in the country. However, there are reasons for optimism. China’s state-backed funds have been purchasing billions of dollars’ worth of shares to stabilise markets. This helped prop up the Hang Seng and CSI 300 Index, which gained 6.6% and 9.35% respectively last month. Elsewhere in Asia and Latin America, markets were more muted, as investors wait for renewed signs of dollar weakness.
Outlook
We continue to be in an election year in the US, and elsewhere, so central bankers will be cognisant of taking actions that may have political implications, and monetary conditions do seem to be supportive of markets at present. Clearly, inflation levels will continue to dominate both the central banks and investors’ thinking. The positive moves seen in bond markets late in 2023 should be viewed as a sign of things to come if we see interest rate movements in the right direction. However, we should still be aware of the high levels of government debt being issued at present, which may adversely affect bond markets and dampen some of the effect. A weaker dollar would favour emerging markets and as we go through the year, we will get some visibility about whether the strong earnings underpinning the US market are being maintained.
*Yield curve control (YCC) – for a number of years the Bank of Japan have been limiting the maximum yield available on their 10-year bonds by buying bonds in the market, thus limiting the return available.
Disclaimer: This document is written by our investment partners Rockhold Asset Management Ltd. Its content is for your general information purposes only and does not constitute investment advice. The commentary is intended to provide you with a general overview of the economic and investment landscape. It is not an offer to purchase or sell any particular asset and it does not contain all of the information which an investor may require in order to make an investment decision. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.