Leadership starts to rotate away from the technology giants
Following a period of exceptional strength over the past six months, the performance of global equity and bond markets was more mixed during April. Emerging markets and Asia closed broadly flat, with the exception of China, where share prices recovered following a poor start to the year, and bonds continued to drift lower, closing off 1% on average. Beneath the surface, the leadership of the market showed early signs of changing hands.
Profit-taking in the US as inflation proves sticky
The sell-off in the US was driven by investors recalibrating to an environment of stickier than expected inflation. The mega cap technology stocks that have led the market in recent months finally saw a correction, as higher bond yields put downward pressure on share prices. Disappointing earnings forecasts at Meta Platform also raised concern over whether the AI euphoria that has powered the bull market may have run too far. Jitters spilled over to other 'Magnificent 7' stocks, with stock market darling Nvidia dropping $200bn in value in a single day.
Overall US earnings, however, were 5% ahead of forecast for the first quarter, supported by a robust economic backdrop, and both the US and Japanese markets recovered somewhat towards the end of the month on the back of solid earnings figures. Other sectors fared better still, with expectations for stronger growth and more persistent inflation benefiting economic-sensitive and commodity exposed stocks.
The gold price continued on a tear, rising a further 2%. The strength in bullion fed through to some blowout numbers for the gold mining companies: the world's largest, Newmont, exceeded earnings forecasts by more than 50%, while Agnico Eagle recorded record profit margins and beat forecasts by 25%. Industrial metals also experienced a strong move up, with the copper price jumping 15%. The oil price whipsawed on escalating tension in the Middle East, surging above the $90 level at one point and closing the month 2% higher.
Out of recession, and back in favour
Among major markets, the trend in favour of less fashionable sectors such as financials and resources was most beneficial for the UK, which has a relatively high exposure to traditional 'value' areas that performed strongly. Moreover, a £31bn bid by BHP for rival Anglo American further underlined the UK's low valuation in relative terms. The deal would create the world's largest copper mining business and may well usher in a period of deal-making in the global mining sector as companies gear up for the energy transition. The recent surge in the copper price has highlighted the current lack of mining capacity in the face of strong demand.
The rate of inflation has continued to trend lower in the UK, falling to 3.2% in March, suggesting that monetary tightening is working. The biggest contribution came from food, with prices rising less than a year ago, although this was partially offset by an uptick in the price of fuel. Overall, the UK has been on a stronger footing since the start of 2024 and is now officially out of recession according to the latest figures from the ONS: the economy grew by 0.6% in the first quarter, having shrunk by 0.3% during the final quarter of 2023. The Bank of England did not meet in April, but Governor Andrew Bailey appeared optimistic in recent comments regarding the progress of inflation, noting that rates might need to be cut more than the markets are currently pricing in. He went on to state that the UK and the rest of Europe are facing less of an inflation threat than the US. Analysts expect UK inflation to fall rapidly over the course of 2024 to below the Bank of England's 2% target, opening the prospect of a summer rate cut.
A resilient economy pushes rate cuts further out
On the economic front, the US remained the bright spot amongst the major regions. The Fed's Beige Book painted an upbeat view of economic prospects: personal consumption expenditure is growing at a solid pace, rising 2.5% in the first quarter, while overall sentiment rose to the highest level in two years and is now only slightly below its long-term average. This is remarkable given the historically steep rise in interest rates.
Inflation, however, remains a concern, having reaccelerated in recent months. Data for March CPI came in hotter than expected for the third month in a row, rising 3.8%, increasing concerns that inflation is becoming entrenched as the economy powers ahead. As a result, Fed Chair Powell has pushed back the timing of a rate cut to late 2024, likely after the US elections in November.
Elsewhere, the global economy is finally receiving a boost from improving sentiment in China. Analysts revised up their outlook for Chinese growth this year as factory activity accelerated more than expected. The overall economy expanded at an annualised pace of 7.5% during the first quarter.
A note from the desk
I am pleased to share our monthly update on market events. The overview seeks to summarise market movements together with our views and the rationale for the positioning of investments going forward. As always, should any aspect of this commentary prompt a question, we would welcome the conversation.
Martyn Charlwood · Managing Director
Is sector leadership finally changing hands?
The US Fed's dovish policy pivot in December was in hindsight too early and has now been mostly unwound. As a result, US equities have corrected some of the speculative excess built up over the past six months, particularly in the mega cap technology stocks. However, investors remain relatively sanguine about prospects for equities going forward, as the stronger economy that is driving yields higher should also drive up future earnings, which is supportive of equities.
One of the greatest rebalancing opportunities of the last quarter-century was to have reduced technology holdings in the late 1990s and redeployed the proceeds into economy-sensitive and commodity stocks. Present conditions look very similar. The key question going forward is whether markets are finally experiencing a more sustainable switch in sector leadership away from the excessive dominance of the US market and its 'Magnificent 7' stocks. Recent trends are encouraging in this regard: year to date, the US is no longer the standout performer, technology stocks have fallen down the pecking order, and UK large caps have been aggressively breaking out to new highs.
The commodity bull market is also gathering momentum. Gold, energy and industrial metals have emerged as a leading asset class in recent months. Gold has an ally with almost unlimited financial firepower: the major central banks, which have been reallocating their massive reserve holdings away from US treasuries and into bullion. Longer term, of course, higher commodity prices have the potential to be inflationary, but right now they are signalling improving global economic demand, and investors are buying into the reflationary story. The CRB commodity price index has climbed by double digits so far this year, led by copper, which is currently flirting with a record high. Goldman Sachs has forecast an extremely punchy further 50% gain for copper over the coming year, predicting that the energy transition will fuel the electrification of everything, with increased demand creating a supply deficit for the conductive metal.
Record highs tend to produce more record highs.
The recovery in commodity prices is providing an additional performance boost to the UK equity market, which is finally starting to play catch-up having been left behind in the global tech-focused boom. With the market continuing to look attractively valued, there is reason to think it can continue to perform well. Recent economic data has been more upbeat and this, combined with the prospect of lower rates, is a positive environment for equities. Along with several of the leading resource stocks, the index also includes a number of blue-chip companies with attractive global brands. Many of these feature strong cashflow, solid yields and increasing shareholder returns through higher dividends and share buy-backs, yet are valued at a discount to similar stocks listed elsewhere.
Our positioning has not changed in response to a single month of rotation. Portfolios remain built around regions and assets where valuations are attractive, with explicit protection against the possibility that inflation stays higher for longer.
Overweight the unloved regions
On a global basis our standard portfolios remain overweight the UK, Japan, Asia and emerging equity markets. These regions have lagged the US and valuations look much more appealing.
Bonds over cash, with clear eyes
While equities remain our preferred asset class, the prospect of lower rates means that bonds should outperform cash. Bonds also provide some diversification in the case of slower growth, but do not protect portfolios from the possibility that inflation remains higher for longer, with the exception of index-linked bonds.
Gold as a long-standing anchor
We have held exposure to gold bullion and miners across standard portfolios for a considerable period, through a physical bullion ETF and the Merian Gold & Silver fund. These have provided an essential part of our diversification strategy that has helped reduce volatility and smooth returns in turbulent times. They have also added an additional source of returns as the gold price has surged over the past year to a new record high.
Energy and natural resources
Other positions in the commodity space are the Guinness Global Energy and BlackRock Natural Resources funds, which have provided a further boost to performance this year. Incorporating alternative assets alongside traditional bonds and equities allows us to hedge against inflation and capitalise on wider opportunities.
Important information
This article is a marketing communication intended for general information only. It does not constitute personal advice, a recommendation, or an offer to buy or sell any investment. If you are unsure whether an investment is suitable for your circumstances, please seek personal advice.
Past performance is not a guide to future performance. The value of investments and any income from them can fall as well as rise. Capital values are at risk and not guaranteed. Forecasts and views expressed in this commentary represent our assessment at the time of writing and are subject to change.
To discuss how this commentary applies to your own portfolio, we would welcome a conversation.
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