March 2024 Commentary

The first quarter of 2024 proved to be a strong one for risk assets, with several major equity indices reaching record highs as continued excitement around artificial intelligence (AI) and growing hopes for a soft landing (inflation slowing down with a recession being avoided) played a significant role in steering market dynamics. The ‘Magnificent 7’, a group of technology and AI-related stocks, were up over 17% during the quarter, helping the S&P 500 reach a new all-time high, while strong economic growth and unemployment data also supported market optimism. Positive economic developments were also not solely isolated to the US, with the Euro area defying market expectation by sidestepping a technical recession in Q4 and subsequently releasing a number of data points that suggested an improvement in economic momentum.

Naturally, economic robustness was met with central bank resolve as key officials decided to hold rates steady, while also signalling that imminent rate cuts were unlikely. This, alongside hotter-than-expected inflation readings, forced some investors to reduce the number of cuts expected this year. The result had negative implications for the bond market, where climbing yields led to some capital loss. Staying on rates, and while most countries in the west are deciding on when best to cut rates, March saw a significant milestone in Japan as the Bank of Japan ended their negative interest rate policy, raising the base rate for the first time in 17 years.

Unfortunately, the start of 2024 also saw a continuation of the geopolitical concerns that punctuated much of last year, with the Houthi rebels launching attacks on commercial shipping in the Red Sea which resulted in the US and UK conducting retaliatory air strikes. Furthermore, towards the end of January, a drone attack claimed the lives of three US troops in Jordan, heightening concerns about a broader escalation in the region which were present through much of the first quarter.

Given this backdrop, overall it was a very good quarter for market returns. Global equities increased by +9.4%, with Japanese (+18.6%) and US equities (+10.4%) the best performing, helped by the strong performance of technology stocks. Europe ex UK (+8.3%) also performed well, while the UK (+4.0%) and Emerging markets (+4.2%) lagged the broader market. In terms of equity styles, growth stocks (+9.5%) outperformed value (+7.0%), and small-cap stocks (+3.9%) underperformed large caps (9.4%), essentially because interest rate expectations increased. This was reflected in sector performance, with Information Technology (+12.0%) and Communication Services (+11.2%) the strongest two sectors, while Materials (+1.9%), Utilities (+1.7%) and Real Estate (-1.6%) lagged significantly.

Fixed income markets were more mixed, with clear separation between government bonds and lower quality credit. Looking at the detail, global government bonds (+0.2%) and Global Investment grade credit (+0.2%) finished the quarter flat, behind the riskier areas as the strong rally in equities helped buy/sell spreads to tighten. This was seen in global emerging market debt (+1.4%) and especially global high yield (+2.0%).

In the real assets space, both global real estate (-1.4%) and global infrastructure (+1.4%) lagged the broader equity market, reflecting their sensitivity to rising interest rate expectations. Commodities were strong over the quarter with Crude Oil (+17.7%) and Gold (+7.4%) recovering in part due to the ongoing geopolitical tensions in the Middle East.