News

The start of 2024 has delivered a mixed bag in terms of returns. Developed equity markets were generally positive, (except for the UK), while it was a much tougher start to the year for emerging markets, which sold off in the region of -4.0%. Alternative investments, such as infrastructure and property and the fixed income universe also had a tough January, all posting negative returns.

We saw in the last months of 2023, risk assets and bond markets rally hard on the back of the “pivot” by central bankers from raising rates to potentially cutting them this year. However, after this strong performance in November and December, markets have started to take stock in January. From being very positive on potential interest rate cuts, investors have been less dovish around expectations towards monetary policy. This follows the Federal Reserve (Fed), Bank of England (BOE) and the European Central Bank (ECB) indicating that rates cuts are now likely to start later than they had previously implied.

Outside of the UK equity market, developed markets generated positive returns. The best performing market was Japan which delivered a positive return of +4.4%. After much talk and many years of disappointment, there is real change taking place which is unlocking value within that market. Unwinding of cross share ownership, huge improvements in corporate governance & management buyouts running at the fastest pace in a decade are just some of the drivers behind the Japanese stock market performance.  The US equity market was the next best performer, returning +2.8%. However, the returns were very much concentrated in the large technology sector and even more specifically in the “Magnificent 7”, while many parts of the market made no headway. The strength of these stocks and their large exposure within the global equity index had a similar positive impact on the broad global index.  Asian and emerging markets were weak over the month returning -3.1% & -4.2% respectively. Ongoing economic weakness in China and rising geopolitical concerns in the Middle East were drivers for the poor performance.  The potential postponement of interest rate cuts was the main reason for the negative return of the UK equity market, which declined -1.0%.

Bond markets in the US, UK & Europe all lost ground in January, giving back some of the positive returns we saw at the end of last year. Credit, high yield and government bonds all declined. The worst performing part of the bond market was the UK government index which pulled back -2.7%. This was driven by central bankers’ warnings that interest rate cuts were not as imminent as previously indicated. The sense that the US Fed was not ready to cut interest rates was reinforced by remarks from Fed Chairmen Jerome Powell, who stated that a cut in March was unlikely, which went against the grain of that previously indicated. The narrative became more cautionary, with comments that the Fed were looking for “greater confidence” that inflation was heading to their target levels of 2%. It is easy to understand central bankers caution after all, inflation has hit levels not seen in 15 years, which took everyone by surprise. Plus, we have the lesson of the 1970s, when interest rates were cut too soon, which allowed wage inflation to continue to spiral upwards. None of the central bankers in the developed world want to be remembered as the second Arthur Burns. He was the Fed Chairmen in the 1970’s who went too soon with interest rate cuts, leading to that subsequent ramp up in wage inflation.

A challenging start to 2024 but inflation does look like it is generally under control. Both bond and equity markets will probably be driven around the narrative on the possibility of interest rate cuts. It does look highly likely that rates will be cut at some point, but when exactly remains to be seen.

December was a “sea of green” with the majority of assets delivering positive returns. Markets were buoyed by the cooling of inflation and expectations for dovish monetary policy in 2024. This “pivot” by central bankers saw risk assets rebound strongly in the last couple of months of the year, providing investors with relief in what has otherwise been a challenging and volatile year. The belief through most of the year was for interest rates to be “higher for longer”, this changed when Federal Reserve chair Jerome Powell announced new forecasts pointing to 75 basis points worth of rate cuts in 2024. Weakening inflation numbers across the global economy, soon convinced investors that rate cuts would follow in the UK and Europe.  Markets became encouraged that central bankers had walked the tightrope of quelling inflation while not pouring too much cold water on global growth.

The global equity index returned +4.6% in sterling terms in December, with the standout region being Asian equities which delivered a positive return of +8.2%, which was despite the fact that the Chinese equity market delivered negative returns, as Moody’s cut its credit rating for the country and reports surfaced that borrowers were defaulting on loans in record numbers. Outside of China regions such as Australia & India performed strongly, driven by positive sentiment in relation to future potential rate cuts, plus the weakness in the dollar provided a fillip for the region.

Most other equity regions delivered comparable returns relative to that of the broad global index. A point to highlight is that we saw a strong rebound for small cap stocks, following on from strong performance in the previous month. Small caps in the UK delivered a positive +9.2% return versus the broader UK market which delivered +4.8%.  The rising interest rate environment to combat inflation, has been a real headwind for small caps over the last 18 months or so. The change in guidance from central banks that interest rates could be cut in 2024, has shifted the sentiment from negative to positive for small cap stocks on a global basis as well as within the UK.

Growing confidence that central banks could cut interest rates due to falling inflation rates helped drive positive performance for global bond markets over the month. UK gilts, US treasuries and German bunds returned 5.8%, 3.4% & 3.4% respectively. The strong year end rally ensured it was a positive year for sovereign bonds, a scenario that only a few months earlier would have been hard to forecast. Outside of government debt – investment grade credit, high yield and emerging market bonds all delivered positive returns around the +4% mark. There was also strong showing in the month for alternative investments such as infrastructure and private equity.

A strong end to 2023, which helped most asset classes deliver a positive return for the full year. Inflation may not be fully curtailed but lower inflationary prints are positive.

Most asset classes rallied in November due to expectations that interest rates may have peaked and will be cut next year.   The recovery was fuelled by a couple of factors including signs that inflation may be starting to subside globally, and that the US was showing signs of economic moderation which could result in a ‘soft landing.’

On the inflation front, both US Consumer Price Inflation and core inflation dropped to 3.2% and 4% respectively.  This news coupled with weaker job and manufacturing number raised hopes that inflation levels could reach the 2% target rate by the end of 2024.  In the UK, headline inflation fell from 6.7% to 4.6% largely due to falls in energy prices while Eurozone, inflation fell from 2.9% in October to 2.4%.  While UK inflation remains elevated versus G7 peers it is encouraging to see the direction of travel moving lower.

Equity markets rallied sharply in November lifting most markets into positive territory over the period under review.   The US was the best performing region seeing continued strength from the technology sector leading to further outperformance of growth relative to value.  Europe was also a notable outperformer over the period with the financial sector in particularly benefitting from stronger interest margins and profits.  UK markets also posted gains although it is notable that small and mid-sized companies significantly outperformed large caps based on lower bond yields and expectations interest rates may have peaked.  To put this in context, the FTSE 250 rose +6.7% over the month while the FTSE 100 climbed by only 1.8%.   Emerging markets also posted a modest gain over the period although lagged developed markets.

Like equities, bond markets also experienced broad based gain on the expectation of rates cuts in 2024.   Government bonds saw yields fall sharply over the month with 10-year US Treasuries, UK Gilts and German Bunds all falling more than 50 basis points during the month (meaning bond prices rose).    This dynamic played out across the credit spectrum with investment grade, high yield and Emerging Market debt all generating gains over the period.

Alternatives proved to be more of a mixed bag over the period.   Real estate and private equity were some of the best performing asset classes owing to a more favourable interest rate outlook.  Energy commodities which rallied until late September have fallen in recent months on concerns that economic momentum is continuing to slow.  Precious metals also fell modestly although this was attributed more to Sterling strength which gained 4.3% versus the dollar.

October proved to be a challenging month for most asset classes as geopolitical risks rose and concerns about ongoing inflationary pressures persisted.   On October 7th, the Hamas attack on Israel marked the largest scale assault on Israel since the Yom Kippur War in 1973. Since then, the conflict has intensified with an Israeli ground invasion in Gaza and there are concerns that further escalation could draw in other countries from the Middle East.
In addition to Israel-Hamas conflict, rising bond yields and the likelihood of ‘higher for longer’ interest rates also weighed heavily on market sentiment.  In the UK, inflation remained stubbornly high coming in at 6.7%, the highest rate in G7 countries.  While a fall in food prices offered some respite, this was offset by increasing diesel/petrol prices which left the inflation rate unchanged from September. Despite this, there was a slight drop in core inflation (which excludes food & energy costs) and the Bank of England decided to hold the base rate at 5.25% while downgrading their 2024 growth forecasts.   Looking to North America, headline inflation has been trending lower with the consumer price index falling to 3.7%.  That said, growth prospects have remained surprisingly resilient with the economy posting Q3 GDP growth of 4.9% (annualised).  Combining this with a healthy job market, investors are concerned that the Fed may not be finished hiking interest rates.
Turning to equity returns, there was no place to hide with both developed and emerging markets recording losses over the period.  The UK was one of the worst performers with the FTSE All Share down 4.2% over the month.  A trend we continue to see is the relative underperformance of small and midcap UK companies with the FTSE 250 falling 6.3%.  These companies have been negatively impacted by rapidly rising interest rates and the high inflation we are experiencing.  While this has been a challenging environment, many UK managers state the valuations on offer are the most compelling they have seen which should present good investment opportunities for long-term investors.  Asia and Emerging Markets stocks were also negatively impacted despite the Chinese economy posting a stronger than expected GDP growth figure of 4.9% for the 3rd quarter.
With the expectation of future interest rate hikes from central banks going forward we saw both corporate bonds and government bonds deliver negative returns.
Within alternatives, commodities returns were mixed in October. Oil prices surged following the outbreak of the conflict only to retreat to lower levels as signs of demand started to slow and supply increased off the back of the US lifting sanctions on Venezuelan exports.  While the situation in Israel/Gaza did not materially impact oil prices this is a fluid situation and something to monitor as the conflict unfolds.  Gold performed well as investors gravitated toward ‘safe haven’ assets. Rising interest rates remain a headwind for the real estate and infrastructure sectors which declined over the period.

In general, September was a challenging month for most asset classes, some did manage to deliver positive returns, but this was a more a function of currency moves enhancing returns for sterling investors, rather than positive performance from the underlying investments.

Global equities delivered negative returns, this was primarily driven by long-term rates hitting new highs, with investors adjusting to the more hawkish message from central banks of “higher for longer”. As expected, the US Federal Reserve paused rate hikes at their September meeting, but future rate hike expectations were raised.

Across equities both Japan and the UK delivered positive returns. The Japanese market in local Yen terms delivered +0.5%, a recovery in the Yen over the month, meant the market returned +2.3% from a sterling perspective. There was no change of policy during the month, but comments from the Bank of Japan Governor Kazuo Uedo, seemed to imply a significant policy shift. He has only been in office since April this year, and over the cause of the last few months has set a dovish tone towards monetary & fiscal policy. This it appears, could be shifting more aggressively which had the impact of driving both the Yen and bond yields higher.

While the UK equity market was positive over the month, this hides what was going on under the bonnet. The large cap part of the market (the FTSE 100) returned +2.4%, but the midcap FTSE 250 declined -1.5%, while the small cap part of the market delivered +0.5%. At the same time with a weaker sterling over the month, those internationally exposure companies outperformed domestically focused companies. The FTSE 250 over previous months, has been negatively impacted by rapidly rising interest rates and the high inflation we are experiencing, these factors again were at play for the mid-cap part of the market.

US equities were the worst performing of the equity regions declining around -5.0%, but with a strong dollar over the month were down just -1.0% from a sterling investors perspective. The “higher for long” mantra in terms of US interest rates was the main driving factor and also saw US 10 year treasury yields climb towards 5%.

With the expectation of future interest rate hikes from central banks going forward we saw both corporate bonds and government bonds deliver negative returns.

Within the Alternatives space there were mixed fortunes. Higher rate expectations continued to have a negative impact on infrastructure which declined -1.1%, while commodities were positive, mainly buoyed by the rising oil price, with Brent oil moving above $94 a barrel. Commodities posted a +2.9% return. Strength of the dollar saw the gold fall -0.8%.