- ‘Not yet, but really quite soon’, was the message from the West’s major central banks as they held interest rates for now, but clearly flagged their intention to start cutting rates sooner rather than later. The exact timing and pace of interest rate cuts is a slight variable, but rate cuts starting this coming quarter seems more likely than not. This should serve as a more welcome backdrop for markets, than they have been used to in recent years.
- Falling inflation is the key measure that is allowing central banks to contemplate rate cuts. US inflation peaked all the way back in June 2022, in Europe and the UK, it was October of the same year. The new quarterly setting of the energy price cap in the UK will further lessen the burden of high gas and electricity prices in the months ahead. So too will the pace of food price disinflation, which has seen significant falls in the last 12 months. This steady retreat of inflation is a picture reflected across the developed and emerging world.
- The economic backdrop looks less sinister than previously feared. The US continues to look stronger than the UK and Europe, with a still healthy jobs market keeping the US consumer spending at the tills. Growth in the UK remains hampered by continuing trade and labour shortages as a result of Brexit and the long-term sickness that plagues the labour force. China remains weakened as it continues to struggle resurrecting consumer demand, its property market and an economic rotation to a more domestically-focused consumer economy.
- A destabilising geopolitical environment remains present. War in Ukraine enters its third year and the crisis in Gaza destabilises the Middle East and has created a humanitarian catastrophe. Political risk also remains elevated in this year of global elections.
- Fixed income markets rallied strongly at the end of the year in anticipation of interest rate cuts during 2024, but started the year with more caution, reflecting that they may have got carried away with how many interest rate cuts to expect during this year. Still, fixed income is looking attractively positioned and 15 years after the Great Financial Crisis, we feel fixed income is now alive and well as a source of future investor returns. We are looking for 2024 to deliver solid returns from the asset class and continue to use a selection of investment grade corporate and strategic bond funds, whilst selectively adding to US & UK government bonds in recent months.
- We have had two years of very narrow equity markets; energy in 2022 and mega-cap US tech in 2023 delivering an oversized amount of the total return from equity markets. There are some highly cash generative companies in areas such as mega-cap US equities, but they also look on a rich premium. We continue to believe that valuation is an integral and important part of the investing equation. As such, over the last few years, we have been gradually edging away from areas we believe to show signs of elevated valuation and have sought out (or remain happy to continue to hold) pockets of assets which look relatively attractively valued that can also deliver an ongoing dividend or interest payment.
- Woe continues for the Japanese yen as it weakened significantly versus the British pound, despite the Bank of Japan ending their negative interest rate policy. Sterling was broadly flat in comparison to both the US dollar and the euro.
- Brent Crude has steadily risen this year and finished the quarter at $87/barrel. Daily US oil production now easily surpasses that of Saudi Arabia, which alongside improving well productivity in non-OPEC + countries represent a challenge to OPEC in its attempt to control pricing. Gold shone particularly brightly, rising through the quarter to finish the end of March at a record high, breaking $2265/oz.
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