Macroeconomic backdrop

Key central banks suggested that rates would be cut this year and appeared less concerned about the possibility that inflation would rebound. The US Federal Reserve (Fed) kept rates on hold at its March meeting and maintained its guidance for three 25 bps rate cuts in 2024, with financial markets now readjusting to the Fed’s own projections. After months of speculation, the Bank of Japan (BoJ) finally exited its below-zero interest rate policy and ended yield curve control, while the Swiss National Bank (SNB) became the first major central bank to reduce interest rates this cycle. The SNB reduced rates for the first time in nine years.

Market update

Global equities rallied during March, with the MSCI All Countries World Index rising 3.1% in USD terms and many markets touching news highs, with the result they enjoyed their strongest first quarter returns in five years. Japanese stocks extended their buoyant year-to-date gains. European shares were among the best performers during the month, supported by signs of improving economic data. Meanwhile, US equities rose in line with the global average. After surging in February, Chinese stocks posted another month of positive returns. Government bonds moved higher, and yields declined on the expectations that rates would be cut later this year. Corporate bonds outperformed government debt, with credit spreads narrowing to the tightest levels in more than two years. Elsewhere, the US dollar appreciated against other major currencies, while the euro rallied against the Japanese yen. Brent crude oil rose by nearly 5% and gold by 8%, moving above $2,200 a troy ounce for the first time on record.

Our view

Within equities, our asset allocation remains unchanged. Equity markets have continued to rise, but concerns are growing about the more expensive valuations and the abundance of positive sentiment. Yet, any meaningful correction will need to be driven by a materially negative macro event or a deteriorating earnings outlook, neither of which is our base case. There are some macro-economic risks we are alert to, in particular, inflation proving more sticky or weaker than expected economic growth. Despite this, we think that markets will continue to focus on the improving interest rate outlook, with rate cuts now likely to occur as soon as June. This positive narrative will likely be the overriding factor supporting stocks in the coming months.

US and Japanese equities remain our preferred markets, while we expect Europe to lag on its weaker macro and EPS growth prospects.

As for fixed income, we are upgrading our positioning on US and euro government bonds to overweight. While the overly optimistic (i.e. aggressive) rate cut expectations have been priced out of markets following their run up late last year, we see government bonds offering some attractive upside. Yields have been reasonably range bound in recent weeks, however, the likelihood that we will finally see interest rate cuts in the summer suggests the potential in the near term for a break out with yields trending lower (and consequently bond prices moving higher) in both the US and eurozone.

Elsewhere, we have taken profits in our emerging market debt holdings, following this asset’s strong performance since February and have also reduced exposure to alternatives and cash.