Q1 2024
Strong economic indicators injected optimism into the investment community during the initial months of 2024, as the US economy's growth in the last quarter of 2023 surpassed expectations. Furthermore, the composite Purchasing Managers' Index (PMI) signaled robust expansion, enhancing investor morale. Similar positive economic trends were observed globally, bolstering the anticipation of a gradual economic slowdown without a hard landing.
In this environment, global stock markets experienced notable gains, with the MSCI All Country World Index (ACWI) climbing 7.4% in the first quarter. Meanwhile, market volatility remained subdued, with the VIX Index, which gauges stock market volatility, averaging around 14 during this period.
For bond investors, the period presented challenges. Persistent inflation, strong economic activity, and the Federal Reserve's shift from its previously more cautious stance resulted in bonds yielding negative returns. This change in economic outlook led to a decrease in the anticipated number of US interest rate cuts in 2024, aligning market expectations with the Federal Reserve's projections. This recalibration, alongside dwindling hopes for substantial rate reductions, drove the Bloomberg Global Aggregate Index yield up by 28 basis points, culminating in a -2.1% return for the quarter.
Real estate and other assets sensitive to interest rates also faced downward pressure due to rising rates, with the Global REITs Index dropping by -1.5%.
In the commodities sector, the Bloomberg Commodity Index edged up by 2.2% last quarter, with declining gas prices being more than compensated for by rising oil prices due to continued supply constraints and geopolitical uncertainties.
Stock markets in developed nations fared well in the first quarter, particularly due to the strong performance of growth stocks, which returned 10.3%. This trend was especially pronounced in the US, where the S&P 500 surged 10.6%, significantly outpacing most counterparts. This was largely driven by the exceptional earnings growth of the top seven US companies, which propelled the overall index's earnings growth to 8%.
Japan stood out as the quarter's top performer, with the Topix index soaring 18.1%, despite the Bank of Japan's move towards policy normalization in March, which included ending negative interest rate policies and equity purchase programs.
Although European equities saw some indices, like the French CAC 40, hit new highs, they generally underperformed compared to the US and Japan. The MSCI Europe ex-UK Index reported a 9.7% return. However, Europe's markets gained momentum towards the quarter's end, attracting global investors looking beyond the concentrated US market towards regions with more favorable valuations and growth prospects.
Emerging markets lagged behind, with the MSCI Emerging Markets Index gaining just 2.4%, amid concerns over China's growth trajectory in the absence of substantial fiscal stimulus. Nonetheless, the MSCI China Index rebounded by 12.3% from its January nadir, buoyed by improved economic activity data and policy easing by the People's Bank of China.
UK stocks underperformed international peers, with the FTSE All-Share Index increasing by only 3.6%. The UK market's struggles were attributed to its value orientation and the nation's economic downturn, as it entered a technical recession in the latter half of 2023.
In the fixed income realm, the Bloomberg Global Aggregate Index declined by -2.1% last quarter due to rising yields fueled by hotter-than-expected US inflation figures. European bonds, particularly from higher-yielding countries like Italy, outperformed US Treasuries, although UK Gilts lagged, reflecting persistent inflationary pressures and the Bank of England's commitment to maintaining a tight monetary stance.
