Keeping You Informed Matters
Economic Review April 2024
Stock markets move higher despite there being a long list of things to worry about, with asset markets around the world performing well in the first quarter. New highs were achieved not only in the USA, but also in Japan and in several European markets. Bonds languish, gold also hits a new high while the Magnificent 7* begin to deviate.
*As a reminder, the Magnificent 7 are the following technology stocks: Apple, Microsoft, Amazon, Alphabet, Tesla, Nvidia and Meta Platforms.
The Outlook
Perhaps the most interesting new peak was in Japan, where the stock market finally got back to its 1989 level, and then continued to go higher. The Bank of Japan ended its seven and a half year experiment with negative interest rates by raising policy interest rates from -0.1% to just above zero. Arguably, Japan has finally recovered from the long slump that followed the bursting of its 1980s land price bubble. Japanese shares are now rising, yet still seem sensibly priced relative to likely future cash flows. There is also a story of positive change within Japan: regulatory changes, designed to improve corporate governance, have pushed management teams to put a greater focus on returns to shareholders. In light of this improving situation, we decided to improving situation, we decided to diversify and raise our weighting to Japan in Unconstrained strategies during the quarter, where the existing defensive exposure has been out of favour with the broader market momentum.
On the US stock market, the AI-themed Magnificent 7 stocks continued to dominate investor attention and had a heavy influence on major indices. Interestingly, the seven stocks are now beginning to diverge from one another and so no longer behave as one single theme. For example, chipmaker Nvidia produced excellent corporate trading results, experienced upgrades to expected future earnings and saw its shares rise by 80% during the quarter. By contrast, Apple shares fell 11% in Q1 after news emerged of poor sales in China; and Tesla shares slumped 29% as it warned of lower future revenue and experienced big downgrades to earnings forecasts.
Despite most European economies being either stagnant or in mild recession, many of their stock markets are hitting new highs. Even Germany, whose economy has struggled in recent years due to higher imported energy costs and weaker exports to China, saw shares rise to record highs during the quarter. UK equities are approaching all-time highs, and still look cheap when compared to shares in most other markets. Take-over bids for smaller and mid-sized UK firms abounded during the quarter, many at large premiums to the original share prices.
The ‘odd one out’ amongst stock markets has been China, with its Shanghai and Hong Kong exchanges still roughly 40% below their peaks of 2021. However, even these markets began to bounce once government introduced stimulus measures and made it clear that they wanted to see higher share prices. To reinforce the message, regulators clamped down on hedge fund activity and even introduced measures to restrict some investors from selling shares! It is not clear that the recent bounce in Chinese shares will be sustainable.
Bonds languish
By contrast to rising stock markets, bond markets were mostly dull in Q1. The period started with expectations for slowing economies and great hopes for a series of interest rate cuts. However, these hopes faded as steady economic growth and inflation data emerged in the USA. As investors adjusted their expectations, US government bond yields rose slightly (bond prices fell). UK bonds fared a little better, but overall, the total returns from bonds were lacklustre during the quarter.
Gold hits an all-time high
Looking beyond stock and bond markets, gold hit an all-time high, with a convincing move upwards in March. Why might gold be setting new records now? Gold tends to do well under certain circumstances: for example, when there’s monetary inflation or there are prospects for falling interest rates relative to inflation; or when geopolitical tensions are elevated, or there is heightened fear of a market dislocation. It could be any combination of these factors (or something else entirely) but the continued, massive US government spending deficit hints at fears of further monetary ‘debasement’. Neither US Presidential candidate seems keen to reassert fiscal discipline, which bodes well for a strong gold price. Our client portfolios have a modestly-sized position in gold – recall that gold can diversify a portfolio over the long-term, thus reducing overall volatility and risk.
Outlook
Professional economists have had a torrid time trying to forecast inflation, the economy and the path of interest rates these past few years. This pattern of failure continued into Q1 2024, when expectations of imminent interest rate cuts proved premature at best; and plain wrong at worst. It’s been no easier trying to predict moves in stock and bond markets.
Instead of trying to forecast economies and asset prices precisely, we think about a range of possible scenarios and outcomes, which can help us to understand risks. We also look at the valuations of different assets today, and use these as a guide to expected long-term returns. The actual returns achieved are bound to differ from these expectations, especially in the short-term, but this is a useful tool that helps us to make investing decisions.
If the US economy remains resilient while the Chinese economy recovers due to various government stimulus measures, it is quite possible that commodity prices will waken. For example, copper – an important element in the likely global energy transition – currently trades around 17% below its peak level of two years ago. Our portfolios hold a variety of commodity-related assets, and so would participate in any such recovery. Under this scenario, though, inflation might remain stickier than central banks predict, and interest rates would likely stay near their current range.
One of the subjects we’ve been studying and thinking a lot about is the impact of artificial intelligence (AI) on companies, markets and even on social, cultural and political affairs. This is pertinent to investors today because of the excitement around the Magnificent 7 US stocks, but also the eventual impact of AI on all sorts of organisations: manufacturers, retailers, insurers, educators, health-providers and beyond. What’s interesting is that many knowledgeable, thoughtful people seem to hold so many differing opinions on the likely impact of AI. The divergence seen already within the Magnificent 7 stocks suggests that AI was never a simple theme to ‘play’ – but should instead be seen as a much more complex, evolving issue to consider with respect to all organisations. We’ve considered technological ‘shocks’ from the past, such as the widespread adoption of mobile phones, the internet, and even cars and electricity, to provide a guide to what might happen next in markets.
We’ve also compared the current share prices of AI stocks to their likely future cash flows under a variety of scenarios. We find that a small number of popular AI stocks look sensibly-priced, whereas many embed highly optimistic expectations, and are thus very risky. A few AI stocks look ‘over-priced’ under all but the most extreme scenarios. Although the AI theme is nascent and could develop over many years, the price you pay today for an asset is critical when considering the eventual return. Portfolios hold modest exposure to the Magnificent 7 stocks, but plenty of exposure to firms that can benefit from AI in one way or another over time. We’re mindful of just how difficult it is to make accurate predictions about markets and economies. Rather than taking large risks on a small number of popular stocks, we aim to maintain well-diversified portfolios of shares, bonds and other assets that should serve well under a broad range of scenarios.
Key facts about the world
United Kingdom
- GDP rose by 0.2% m/m in January, following a contraction of 0.1% in December.
- Business surveys suggest that the UK economy is on course to exit its mild “technical recession” in Q1 2024.
- CPI inflation fell to 3.4% in February (from 4% in January), forecast to temporarily fall below the Bank of England’s 2% target in the summer.
Europe
- Inflation forecast to fall to 3% with unemployment likely to remain at current levels. However, ECB President Lagarde says the central bank will not commit to a path of rate cuts.
- GDP growth predicted to increase from 0.8% in 2023 to over 1.4% in 2024.
- The Baltic countries remain exposed to possible further escalation of Russia-Ukraine conflict over the summer, as Germany announced a new €500m military aid package for Ukraine.
Asia
- China’s property market and high local government debt, means achieving the CCP’s GDP target of 5% will be a challenge, growth is expected to slow to 4.6% in 2024.
- The Bank of Japan ended its era of negative interest rates, as it raised borrowing costs for the first time since 2007, from -0.1% to 0.1%. The Nikkei 225 hit its first new all-time high since 1989. The Yen fell to its lowest level since 1990 in March.
- Significant policy rate cuts not expected in next 6 months, despite easing inflation, given pressure from higher U.S. interest rates.
North America
- US forecast for economic expansion of 1.5% in 2024, with core inflation to fall closer to the Federal Reserve’s 2% target. The Federal Reserve continues to signal that it expects to cut rates by 75 basis points this year.
- Unemployment is predicted to rise to 4.6% by 2025, but it remains the world’s largest economy with a GDP worth over 25 trillion dollars.
- US markets continued their rally – with the S&P 500 and Nasdaq both reaching new all-time highs. However, the Magnificent 7 is beginning to diverge, as Tesla fell nearly 30% this quarter.
South America
- Argentina has the highest inflation rate globally at 276.2% as economic crisis continues, largely the result of previous governments printing money to finance spending. The economy is forecast to shrink by a further 2.5% for the year.
- Shares in Brazil’s state-controlled oil major, Petrobras, fell 10% in a day, as President Lula is accused of political interference in some of Brazil’s largest companies.
Africa
- The bankrupt southern African nation and the continent’s second-biggest copper producer, Zambia, has agreed to restructure nearly $4bn in US dollar bonds with private investors.
- The price of cocoa surged past $10,000 a tonne for the first time, due to poor harvests, with the main driver being poor weather and disease in Ivory Coast and Ghana, which together produce more than two-thirds of the world’s beans.
Q1 2024 Performance Review
Unconstrained strategies
Key facts
Bull market rolls on in Q1, with returns buoyed by strong earnings and continued appetite for names seen to benefit from the nascent artificial intelligence boom.
Several markets hit record highs, with notably the S&P 500 and gold benefiting from the expectation of future interest rate cuts.
Oil prices rose amid geopolitical uncertainties, putting extra upward pressure on inflation.
Returns from the US technology sector cool as the key Magnificent 7 companies’ performance diverges.
Summary
Different sides of the same coin could be the phrase when assessing the investment trust selections this quarter, with strong performance for the real estate investment trusts (REITs), as Balanced Commercial Property and UK Commercial Property return c14%, while Downing Renewables & Infrastructure Trust is off over 11%. Further consolidation in the REITs gave us the opportunity to sell the position in UK Commercial Property with increased price performance and liquidity on the news, leaving just Balanced Commercial Property as core exposure to the sector across strategies. Downing however, remains under pressure as for now the renewable energy sector is out of favour, but we don’t believe the current price is a fair reflection of the quality of the underlying assets, so remain patient while accruing a growing and high dividend close to 7%.
A regular focus point in strategies over the last several quarters, bond funds had a muted quarter, with those most exposed to changes in interest rates posting losses. Strategies heavy on corporate bonds and other credit investments fared better, thanks to the economy’s strength. Of interest, we are pleased to see the continued strong performance from the Artemis Corporate Bond fund (+0.7%), which has held on to its gains over the last six months and remains ahead of peer group and benchmarks.
The recent addition of the Royal Mint Responsibly Sourced Physical Gold position (+6.5% in Q1) has been timely with the price of gold reaching new highs at the start of the year. This is somewhat in contrast to expectations when markets have been so strong, perhaps reflecting the level of uncertainty that remains, but highlighting the importance of diversification within portfolios.
In equities, we note that of the Magnificent 7, only Nvidia has continued its stellar performance into 2024, while the others fall behind. However, this has been enough to sustain the strength in broad US indices for now and as such, our most tech exposed US fund – the Natixis Loomis Sayles US Equity Leaders, up over 13% – has performed well. – the Natixis Loomis Sayles US Equity Leaders, up over 13% – has performed well. The broad US market exposure through the S&P 500 Equal Weighted ETF was also positive, up over 8%. Otherwise, we have seen particularly strong performance in Japan, where we have initiated a new position in the iShares MSCI Japan ETF, a low-cost broad-based approach to access this market, where we see long term growth potential.
Bouts of optimism over the economy have lead to bursts of performance from our small and mid-sized company exposure, with the Premier Miton European Opportunities fund (+6.4%) and American Century Global Small Cap Equity fund (+8.7%). This hasn’t quite translated to the UK funds with similar exposures, however, we are increasingly optimistic for this allocation within strategies where a number of indicators (e.g. resilient earnings and growth, M&A activity) mean the cheap valuations on offer are starting to become apparent to more investors.
| SECTOR | Q1 2024 | 1 year to 31/03/24 | 1 year to 31/03/23 | 1 year to 31/03/22 | 1 year to 31/03/21 | 1 year to 31/03/20 | 5 years (annualised) |
|---|---|---|---|---|---|---|---|
| IA UK Index Linked Gilts | -2.7% | -7.0% | -27.1% | 3.8% | -1.0% | 5.3% | -6.0% |
| IA £ Corporate Bond | 0.3% | 7.3% | -9.4% | -4.4% | 9.2% | 0.8% | 0.4% |
| IA Property | -1.2% | -1.2% | -10.7% | 10.5% | -2.3% | -2.6% | -1.5% |
| IA UK Equity Income | 2.5% | 7.7% | -0.3% | 10.8% | 32.5% | -20.7% | 4.6% |
| IA UK Smaller Companies | 1.3% | 4.8% | -17.0% | -3.8% | 67.4% | -18.2% | 2.8% |
| IA North America | 10.8% | 25.2% | -4.4% | 15.8% | 42.5% | -3.9% | 13.7% |
| IA Europe Excluding UK | 6.4% | 12.5% | 6.6% | 4.3% | 39.5% | -9.2% | 9.6% |
| IA Japan | 9.3% | 17.5% | 0.4% | -4.5% | 31.9% | -3.6% | 7.5% |
| IA Asia Pacific Excluding Japan | 2.6% | 0.3% | -2.4% | -5.1% | 48.5% | -11.3% | 4.1% |
| IA Global Emerging Markets | 3.4% | 5.9% | -4.4% | -8.7% | 47.3% | -15.9% | 2.8% |
Source: Morningstar in GBP. Net income reinvested. Past performance is not a reliable indicator of future results.
The positioning of our Unconstrained strategies
Cautious
Growth
Balanced
Adventurous
Q1 2024 Performance Review
Ethical strategies
Key facts
Bull market rolls on in Q1, with returns buoyed by strong earnings and continued appetite for names seen to benefit from the nascent artificial intelligence boom.
US regulators, led by the Federal Reserve, have thwarted a push to make climate risk a focus of global financial rules.
Bond markets started 2024 predicting five rate cuts beginning in March, but now traders are betting on three cuts, with the first coming in June.
Big tech stocks continued to drive market gains, with the US Technology Index up 13.1%. Energy stocks recovered from a tough fourth quarter, but infrastructure assets floundered.
Summary
A positive quarter for our ethical strategies, even as the seemingly endless investor appetite for anything seen as likely to benefit from the nascent artificial intelligence boom continues to dominate markets. While this can’t be fully replicated due to our ethical screens, it is the wider food chain we have benefited from as seen in performance of the iShares US Equity ESG Index tracker up 11%. The technology and data theme also appears in some of the global equity strategies, including the Janus Henderson Global Sustainable Equity (+9.7%) and Liontrust Sustainable Future Global Growth (+7.4%) funds performing well.
The Downing Renewables & Infrastructure Trust (-11.6%), remains under pressure as for now the renewable energy sector is out of favour, but we don’t believe the current price is a fair reflection of the quality of the underlying assets, so remain patient while accruing a growing and high dividend close to 7%.
A regular focus point in strategies over the last several quarters, bond funds had a muted quarter. Strategies heavy on corporate bonds and other credit investments have fared well thanks to the economy’s strength, with the Rathbone Ethical bond fund (+2.1%) worthy of note and holding onto its gains over the last six months.
The recent addition of the Royal Mint Responsibly Sourced Physical Gold position (+6.5% in Q1) has been timely with the price of gold reaching new highs at the start of the year. This is somewhat in contrast to expectations when markets have been so strong, perhaps reflecting the level of uncertainty that remains, but highlighting the importance of diversification within portfolios.
Where bouts of optimism over the economy have led to bursts of performance from the small and mid-sized sectors, and value companies over growth peers in the quarter, this has been a mixed blessing for the ethical strategies. Due to the narrower range of potential investments, the focus tends to see more small, value-style companies held. The Montanaro UK Income fund (+1.9%) for example, which focuses on smaller sized companies has been more volatile relative to peers as it reacts to changing inflation and interest rate expectations. The more income and value focused, larger company funds however, like Janus Henderson UK Responsible Income (+2.5%) and EdenTree Responsible & Sustainable European Equity (+2.3%), have seen more consistent return profiles over the quarter.
| SECTOR* | Q1 2024 | 1 year to 31/03/24 | 1 year to 31/03/23 | 1 year to 31/03/22 | 1 year to 31/03/21 | 1 year to 31/03/20 | 5 years (annualised) |
|---|---|---|---|---|---|---|---|
| Global Sustainable | 9.3% | 17.9% | -1.4% | 10.5% | 34.8% | -6.5% | 10.1% |
| UK ESG Enhanced | 3.3% | 9.7% | 3.2% | 10.6% | 24.8% | -18.2% | 5.0% |
| US ESG Enhanced | 11.4% | 27.1% | -3.0% | 19.1% | 42.9% | -1.9% | 15.5% |
| Developed Market Europe Sustainable | 6.4% | 11.9% | 4.1% | 8.2% | 34.6% | -6.3% | 9.7% |
| Emerging Market ESG Enhanced | 2.7% | 5.3% | -7.9% | -7.1% | 37.4% | -16.5% | 0.7% |
| UK Corporate Bond Sustainable | -0.1% | 6.9% | -12.6% | -5.4% | 8.7% | 0.6% | -0.7% |
| Global Corporate Bond Sustainable | -0.2% | 2.4% | -1.5% | -1.9% | -0.7% | 7.5% | 1.1% |
| Global Green Bond | -1.2% | 2.2% | -7.0% | -6.2% | -0.8% | 5.7% | -1.4% |
| Global Renewable Energy | 0.7% | 0.1% | 3.3% | 7.1% | 56.3% | -11.1% | 9.0% |
Source: Morningstar sustainable indices in GBP. Net income reinvested. Past performance is not a reliable indicator of future results
The positioning of our Ethical strategies
Cautious
Growth
Balanced
Adventurous
Disclaimer
Opinions constitute our judgment as of this date and are subject to change without warning. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment. Past performance is not a reliable indicator of future results and forecasts are not a reliable indicator of future performance. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down. The information in this document is not intended as an offer or solicitation to buy or sell securities or any other investment, nor does it constitute a personal recommendation.