Investment Commentary – March 2024

2 minute read

The equity market rally that began in October last year, continued its steady progress in March. Although there were brief pauses, these only lasted several days, before new highs were reached. A focus was on major central bank’s interest rate decisions in the month. Although headline rates were not changed by the Federal Reserve, European Central Bank or Bank of England, as was widely expected, the guidance for rate cuts later in the year was welcomed by investors.

As inflation continues to trend lower, driven by declines in energy and food prices, central banks are increasingly suggesting that some rate cuts are likely. However, they have been keen to stress that some more evidence is required before the process can begin. Markets are currently pricing in around three 0.25% rate cuts over the course of the year, taking rates in major markets to 4-4.5%. This could still be seen as moderately restrictive, given where rates have been over the last 15 years.

In the UK, economic data released in the month is beginning to suggest a slight recovery following the recession seen in Q4 2023. Most encouragingly, growth in household real incomes is expected to support a recovery in consumer spending. So far, households have been looking to rebuild their savings following a contraction in real incomes over the 2022/2023. This has resulted in an increase in the savings ratio, leaving room to fall back to longer term averages as economic confidence improves. While higher mortgage rates are yet to bite and may prove to be a drag as the year progresses, higher incomes may shoulder some of the burden. Furthermore, the UK has some of the most favourable inflationary tailwinds in the short term, with energy prices in particular, being deflationary over the coming months.

Within markets, stronger than expected economic data continues to favour equities over fixed income, although corporate bonds have performed strongly. While earnings growth is present, the bulk of the equity market return is from valuation expansion, with little sign that earnings growth is likely to increase. Resultingly, such a rally cannot be sustained, unless a more meaningful surprise from the economy. Furthermore, with increasing scrutiny on the dominance of big tech from both US and European regulators, there may be limits to how much this increasingly important area of the market is able to drive returns. This issue was most clearly illustrated in the month with the US Department of Justice bringing a lawsuit against Apple for what it called monopolistic behaviour in the US smartphone market. Shares fell 4% on the day, equivalent to around $100bn of equity market value.

Elsewhere, geopolitical risks remain elevated, with tensions remaining high in the Middle East. The attacks on shipping in the Red Sea can now be seen to be having some an effect on the price of goods in European and US markets. In addition, the collapse of the Baltimore bridge, while only expected to have localised effects, is another illustration of how fragile supply chains have become. A combination of seemingly small and localised supply chain disruptions could have broad implications for growth and inflation in global markets.