Is the global economic backdrop positive or negative?
The long-anticipated recessions caused by markedly tighter monetary policy materialised at the end of 2023, with the UK being one of several countries around the world to officially record a technical recession – although some pundits may deem it a meer rounding error. The US economy, on the other hand, continued to defy the odds, despite higher interest rates, growing at a 3% annualised rate to the end of Q1. Off the back of this, global growth is expected to be positive for 2024.
Related to this was the continued reduction in inflation across the US, UK, and wider Eurozone with all regions closing in on official targets. Off the back of this, markets are now pricing in rate cuts beginning in June, however, the expectations for how many there will be has been dampened over Q1, starting with 6 rate cuts at the close of 2023 to now just 2 in the US for 2024.
The economic backdrop should be positive for the near-term prospects for equity and fixed income markets. However, any number of geopolitical or economic shocks could cause inflation to bounce back in short order. Therefore, we believe it continues to be appropriate to maintain suitable diversification in portfolios.
What’s happening in bond markets?
Global bond markets pulled back in early 2024 following the strong close to 2023, where they perhaps got a little ahead of themselves, and following sustained economic resilience that therefore reduced the need for more immediate rate interest cuts. However, a better March led to broadly flat returns for most bond markets over the quarter.
Bond yields remain the most appealing they have been for a long time. However, they are not without risks, as any upward movements in inflation expectations, continued strong economic outlooks, and strong employment figures, could lead to bond price declines as it would signal a further delay in rate cuts.
What’s happening in equity markets?
Stock markets continued to rise in 2024, with the US leading the pack, mainly due to the dominance of large technology companies known as the “Magnificent 7”, which includes firms like Nvidia and Microsoft, enjoying significant rallies. Whilst we feel that the valuations on the Magnificent 7 stocks are high and there may be some “bubble” risks building, though, we are comforted that many of these stocks are profitable and do continue to generate strong earnings.
Prospects of rate cuts moved developed equity markets globally, as investors anticipated looser monetary policy and more favourable economic conditions.
Despite previous poor performance, there were some signs of life in China and Korea towards the end of the quarter. This was partly attributed to potential policy support from China and signs of easing deflationary pressures.
How can we help?
Zoe Till is a Partner and Chartered Financial Planner in our expert Independent financial advisers team. Zoe’s areas of expertise include investment advice, retirement planning, Inheritance Tax and lifetime cash flow modelling.
If you would like any advice concerning the subjects discussed in this article, please get in touch with Zoe or another member of the team in Derby, Leicester, or Nottingham on 0800 024 1976 or via our online form.