Market Commentary – May 2024

Monthly Market Commentary from Quilter Cheviot

By Richard Carter, Head of Fixed Interest Research

Last month saw a change of pace for markets with some selling in stocks as investors digested earnings results, mixed messages from economic data and a further cooling in the bullish sentiment that has prevailed for much of the last 6 months.

Following a robust performance in global equity markets during the last quarter of 2023 and the first of 2024 – where the MSCI World surged 17.2% – investors took a step back, assessing the potential persistence of a rally largely fuelled on expectations of substantial interest rate cuts this year — cuts which look less likely as 2024 has progressed. The MSCI AC World Index returned -2.4% in April in sterling terms, but still stands at +6.9% year-to-date.

Diversified investors will have taken some comfort from the better performance of UK equities in the past month, displaying a repeat of the relative outperformance witnessed in 2022 when risk sentiment was less positive. The MSCI UK index returned 2.8% in April, a month when both Europe ex UK and North American equivalents were negative.

Miners and oil companies positively contributed to this relative strength, even as the prospect of losing Anglo American from the UK market was in the news, following the recent bid by Sydney-listed BHP Billiton. This could, however, serve as the catalyst required to address longstanding, underlying issues of the UK market’s competitiveness which have contributed to a relative long-term underperformance. Chancellor Jeremy Hunt has stepped in with a cautionary note, suggesting that the FCA’s approach to publicly ‘name and shame’ companies under investigation might be excessive. This intervention represents a potential step towards resolving broader corporate apprehensions about choosing London for listings over other locations.

Many benchmarks – including US large-cap stocks – reversed a three-week losing streak during April to finish the month on a more encouraging note, boosted by a strong set of first quarter earnings reports, particularly among mega cap US tech stocks. The US markets have led the move higher since October, so a few weeks of consolidation at some stage should not be too concerning in itself.

The US tech sector has reaffirmed its position as a driving force behind market gains, with notable performances from some of the industry’s heavyweights. Alphabet (Google) saw its share prices soar after announcing first-quarter earnings that far exceeded expectations, coupled with the company’s inaugural dividend distribution. Netflix also enjoyed impressive results. One of the original pioneering FANG stocks, its operational income soared by 54%, with a notable addition of 9.3m subscribers globally in the first quarter.

Inflation still a talking point

Price pressures in the world’s largest economy continue to deter the Federal Reserve (Fed) from lowering interest rates. US inflation metrics have ticked higher in recent months and although they remain well below their peaks from 2022, they continue to track comfortably higher than the central bank’s 2% inflation target. The recent rise in inflation could be seen less negatively in some respects as it is reflective of a strong underlying economy that appears, thus far, to have delivered an unlikely no landing scenario from the Fed’s aggressive tightening of monetary policy.

Fed chair Jerome Powell attempted to toe the line between interest rate cuts and hikes in his latest communication, pointing to ongoing economic strength as a reason against lowering rates while also pushing back on rate rises. The short shrift given by Powell to growing speculation that the next move in rates will be higher is reassuring, although at the same time, the Fed chair offered little to excite the doves hoping for imminent policy easing.

All in all, it seems the Fed is content with the current levels of rates, deeming them appropriate for an economy that is sending messages open to different interpretations. This will likely mean a greater level of data dependence going forward for market participants, as doves will look for signs of economic weakness — the April ISM manufacturing PMI slipping back into contractionary territory one such example — while hawks will latch on to hints that the recent rise in inflation will continue, and may even accelerate.

Closer to home in the UK, inflation also remains a pressing issue, yet the final weeks of April brought some muchneeded positivity. Shop price inflation decelerated to 0.8% in April – a decrease from 1.3% in March and beneath the three-month average rate of 1.4%. These figures have brought the retail inflation rate to its lowest since December 2021.

This data offers some relief to a Bank of England (BoE) that is facing increasing pressure to deliver interest rate cuts. The base rate stands at 5.25%, unchanged in recent months after the swift hiking cycle.

It’s a similar story in mainland Europe, where inflation dynamics appear to be improving. Price pressures in the eurozone stayed at 2.4% for April, while core inflation, excluding energy and food, dropped from 2.9% to 2.7%.

Whereas US growth appears to be slowing, the eurozone economy surpassed expectations with a 0.3% rise in GDP in the first quarter, marking the most robust expansion since the third quarter of 2022. This positive momentum is largely propelled by Germany’s economic rebound, which experienced 0.2% growth after a period of decline. The MSCI Europe ex UK benchmark declined 1.9% in April, holding up slightly better than global stocks that were weighed down by a -3.2% return from North America.

Fixed income outlook

Fixed income markets were largely negative in April, due to a further lowering of expectations for interest rate cuts. A broad gilt index returned -3.2% with the long end (15-year+ gilts: -5.7%) and linkers (index-linked gilts: -3.6%) underperforming. This marks a continuation of the trend year to date as bonds more sensitive to interest rate changes have fared worse as markets have priced in less cuts.

We favour being positioned modestly for a lowering of benchmark rates, as markets are now pricing in a fairly gentle path ahead. Inflation in the UK and Europe appears to be returning to target, and although the situation is proving more stubborn in the US there are signs of economic cooling that would help ease price pressures.

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Quilter Cheviot – Monthly Market Commentary – May 2024

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