Overall Market Summary:
Global stock markets registered strong gains in Q1, driven by a resilient US economy and ongoing enthusiasm for Artificial Intelligence (AI). Expectations of interest rate cuts also boosted shares, though the pace of cuts may be slower than anticipated at the start of the year. Bonds experienced negative returns for the quarter.
United States:
US shares saw significant advances in the first quarter. The gains were bolstered by positive corporate earnings and expectations of rate cuts later in the year. While the pace of monetary policy easing is likely to be slower than previously expected due to resilient US economic data, this did not dampen investor appetite for equities.
The S&P 500 index was buoyed by strong corporate earnings, particularly from some of the "Magnificent Seven" companies. Leading sectors included communication services, energy, information technology, and financials. Real estate and utilities lagged, with real estate posting a negative return.
The Federal Reserve (Fed) kept interest rates steady at 5.25-5.5%. US inflation slightly increased to 2.5% year-on-year in February, up from 2.4% in January (measured by the personal consumption expenditure metric). Fed Chair Jerome Powell stated that the central bank would be "careful" about deciding when to cut rates. The latest "dot plot" suggests three rate cuts this year.
Data releases highlighted ongoing economic resilience. Annualized GDP growth for Q4 was revised up to 3.4%. Nonfarm payrolls were robust, although the unemployment rate rose in February. The ISM manufacturing PMI indicated expansion after 16 months of contraction, rising to 50.3 in March.
Presidential primaries were held in several states during the quarter. Donald Trump emerged as the presumptive nominee for the Republican Party, while his main challenger, Nikki Haley, dropped out in March.
Europe:
Eurozone shares posted strong gains in Q1, led by the information technology sector amid optimism over AI-related technologies. Other top-performing sectors included financials, consumer discretionary, and industrials. Improvements in the economic outlook boosted economically sensitive stocks, while banks were supported by announcements of shareholder return improvements. Utilities, consumer staples, and real estate lagged.
Signs of improving business activity were evident, with the flash eurozone purchasing managers' index (PMI) rising to 49.9 in March from 49.2 in February. Eurozone inflation continued to cool, with the annual inflation rate falling to 2.6% in February from 2.8% in January. European Central Bank President Christine Lagarde downplayed the chances of imminent rate cuts, emphasizing the risks of reversing any cuts prematurely.
United Kingdom:
UK equities rose over the quarter, with financials, industrials, and the energy sector outperforming alongside other economically sensitive areas. Market expectations shifted towards a sooner-than-expected first interest rate cut as inflation undershot the Bank of England's (BoE) forecasts.
At its March meeting, the BoE's Monetary Policy Committee (MPC) kept the main policy interest rate on hold at 5.25%. Annual inflation, measured by the consumer price index, fell to 3.4% in February, the lowest rate since September 2021.
Official data showed the economy had entered a technical recession in the second half of 2023, as post-pandemic "revenge spending" ended and higher inflation and interest rates weighed on activity. The market reaction to the Spring Budget was muted, suggesting that investors had anticipated a bolder budget. Overseas inbound bid activity for smaller and mid-sized UK companies remained a key theme.
Japan:
The Japanese equity market experienced an exceptionally strong rally, with the TOPIX Total Return index recording an 18.1% gain in Japanese yen terms. Foreign investors drove the rally, fueled by optimism over Japan's positive economic cycle, characterized by mild inflation and wage growth. The Nikkei reached an all-time high, surpassing 40,000 yen. The Bank of Japan (BOJ) took significant actions at its March policy meeting, contributing to the new high for the Nikkei 225.
The rally was driven by large-cap stocks, particularly value stocks in sectors such as automotive and financials. The global boom in AI and semiconductors also boosted semiconductor-related companies. Domestic and defensive sectors, including land transportation, services, food, and pharmaceuticals, lagged.
Corporate earnings exceeded expectations, with positive revisions for the current and next fiscal years. The weakening yen supported earnings, but the inflationary environment also boosted earnings for companies with pricing power. The BOJ's overhaul of monetary policy, including lifting the negative interest rate policy and abandoning yield curve control (YCC), was supported by significant progress in the spring wage negotiations.
Asia (excluding Japan):
Asia ex Japan equities achieved modest gains in Q1, with share prices rebounding from recent lows. Investors displayed cautious optimism that the gloom surrounding mainland China might be lifting. Taiwan, India, and the Philippines were the strongest markets in the MSCI AC Asia ex Japan Index, while Hong Kong, Thailand, and mainland China ended the quarter in negative territory.
Taiwan's growth was driven by ongoing investor enthusiasm for AI-related stocks and technology companies. Chinese stocks ended the quarter lower as foreign investors remained cautious about the Chinese economy. Indian stocks performed well, bolstered by hopes for political stability and continued stock market growth if Narendra Modi wins a third electoral victory this year.
Emerging Markets:
Emerging market (EM) equities gained in Q1 2024 but underperformed compared to developed markets. China weighed on returns despite some policy stimulus measures. Expectations of delayed Federal Reserve (Fed) rate cuts aided returns but negatively impacted interest rate-sensitive markets like Brazil.
Peru was the top-performing market, aided by currency and monetary policy easing measures. Turkey also posted strong returns, with the central bank continuing its orthodox monetary policy approach. Colombia benefited from central bank rate cuts.
Taiwan outperformed on continued investor enthusiasm for AI and the tech sector. India also outperformed, helped by local currency strength ahead of April's general election.
Korea posted a positive return but underperformed broader EMs due to weakness in speculative AI and battery stocks. China fell in US dollar terms, impacted by the healthcare sector and ongoing US-China tensions. South Africa and Brazil also underperformed, while Egypt posted the worst returns due to significant currency devaluation.
Global Bonds:
The first quarter of 2024 saw a significant shift in inflation and interest rate expectations. Initially, faster central bank action to lower rates was anticipated, but expectations were scaled back. The Bank of Japan (BoJ) increased interest rates from -0.1% to 0.1%, ending negative rates. The Swiss National Bank surprised markets with a 25 basis point cut to 1.5%. The European Central Bank, Bank of England, and Federal Reserve (Fed) proceeded cautiously, avoiding premature declarations of victory over inflation.
Global economic activity was on the upswing, with the US economy outperforming due to sustained consumer spending. The eurozone saw slower progress, but there was optimism with a rebound in the service sector and signs of manufacturing revival. China's recovery continued, although the property sector struggled.
Inflation remained a central concern. Despite signs of diminishing pressures, unexpected high inflation readings tempered enthusiasm for imminent rate cuts. Both the US and eurozone reported higher-than-expected inflation rates.
Government bond yields increased in response to shifting market sentiments and economic indicators. The US 10-year Treasury yield rose from 3.87% at the end of Q4 2023 to 4.21% at the end of Q1 2024. The UK 10-year gilt yield increased from 3.54% to 3.94%, while the German 10-year Bund yield rose to 2.03%. Corporate bonds outperformed government bonds, with UK high yield being a notable outperformer.
Convertible bonds did not fully benefit from the strong equity market. The FTSE Global Focus convertible bond index advanced 1.1% in USD hedged terms for the quarter. Primary market activity remained strong, with good demand for new convertibles. Valuations, however, remained subdued.