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After interest rates peaked in November 2023, investors began to eagerly anticipate the point at which the Bank of England, the Fed and their counterparts would consider the battle against inflation won and begin to cut interest rates. Their eagerness drove markets up in a fierce rally at the end of the year, but as central banks have been much slower in taking action, markets have been back pedalling for much of 2024. Although in April UK equities were an exception, with Asia and emerging markets equities also making gains.

There was a pullback in the US stock market, which fell nearly 2% over the month. Inflation has not fallen as fast as expected and dampened hopes of near-term interest rate cuts. The consumer price index (CPI) for March ticked up, bringing the annual reading to 3.5% from 3.2% in the previous month.  The rise in inflation and strong jobs market data, pushed back the markets expectation of when the Fed would look to start cutting rates. Earlier in the year there had been high expectation of around six interest rate cuts this year. This euphoria has dwindled to maybe one or two rate cuts. Inflation numbers, however, do look much healthier than a year ago, but equity markets are looking for lower interest rates to push higher and are instead ebbing and flowing according to the latest musings of Fed chairman Jerome Powell. With the US making up approximately 70% of the global equity market, it’s no surprise global equities also declined, but Europe and Japan were weak performers too. In the case of Japan, a weak yen has been the headwind, but we expect this to recover as interest rates in the US eventually start to come down. The performance of Japanese businesses has not been an issue and their earnings have remained strong.

The standout market for the month was the UK which bucked the trend and delivered over a 3% positive return. Whereas in previous months it has all been about the US and the technology sector, April saw a return to less fashionable areas of the market such as financials and resources, which make up a significant component of the large cap UK index (the FTSE 100). The excitement was not contained to the largest companies. We also saw an increase in overseas buyers swooping to snap up UK businesses, which drove positive returns further down the market cap spectrum. With many businesses in this part of the markets delivering strong earnings that are not fully reflected in their share prices, interest from foreign acquirers seems likely to continue for some time.

Emerging markets also delivered a positive return, on the back of a rebound in China’s economy. The recent growth figures were better than expected, showing a 5.3% improvement, suggesting that policy support may be starting to have the desired effect. It has been a long path for the Chinese economy over the last few years. It may now have found a bottom. If that proves to be the case, investors may start to return to the market again, which would be a powerful driver for returns.

Slow to materialise interest rate cuts have been a headwind to other asset classes too, with property, infrastructure and bond markets also waiting for good news. As a result, bond markets were weak in April. The narrative of “higher for longer” interest rates to bring inflation back down to central banks’ 2% target level had a negative impact on all parts of the bond market: government debt, corporate bonds, high yield and emerging markets. Uncertainty over when the promised cuts will emerge has caused some volatility. The big picture is that inflation is in a much better place than it was 12 months ago (we should not lose sight of this) and that bonds are offering an attractive level of return at the moment.

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