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.
16th February 2024
Cappuccino Commentary
A relaxed read on the issues of the day
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.
This information is intended for professional financial advisers only. Copia does not provide financial advice. This information is not intended as financial advice and should not be interpreted as such.