April 2024- Market Update
Global Perspective:
In April, global equity markets experienced a setback, marking the first decline in six months with the MSCI World down by 3.7% (USD). This downturn was prompted by recent US economic indicators which persuaded investors that interest rates would need to remain elevated for an extended period. Both equity and fixed income markets faced challenges throughout the month. Heightened US inflation figures coupled with a seemingly weak initial glance at the first quarter US GDP, which nonetheless revealed resilient private demand, fueled concerns in the market that central banks might delay monetary policy easing. Consequently, both stock and bond markets reacted negatively, witnessing a 3.7% (USD) drop in developed market equities and a 2.5% (USD) decline in global bonds. With the exception of commodities, there was scarce respite in the market as the second quarter commenced, as the prevailing narratives of rising inflation and prolonged higher interest rates dominated. Market sentiment experienced a significant shift concerning the Federal Reserve’s potential actions, as the likelihood and extent of rate cuts diminished. Confidence, once high for at least three rate cuts commencing in June 2024, swiftly transitioned to expectations of a solitary 25 basis point cut, if any, by year-end. Despite these concerns, there were some positive factors in play as we closed out the month. Corporate earnings for the first quarter generally exceeded expectations, with a higher-than-expected growth rate compared to forecasts. Large tech stocks also reported strong earnings, indicating that the secular growth theme in AI remains intact. Furthermore, the sharp pullback in April led to oversold conditions in the market, with less than 30% of S&P 500 constituents trading above their 50-day moving average, down from 92% in Q1. Additionally, geopolitical tensions eased somewhat despite initial concerns about a potential conflict in the Middle East.
US:
In April, the S&P 500 experienced a decline of 4.1% (USD) as valuations faced pressure from escalating bond yields. Despite this setback, April’s -4.1% (USD) performance for the S&P 500 did not disrupt the index’s standing above the 5,000 level, maintaining a positive year-to-date (YTD) level of 5.57% (USD) due to its impressive 10.16% (USD) gain in Q1 2024.The economic landscape continues to provide support for corporate earnings, evident in the ongoing first-quarter earnings season where companies have generally exceeded expectations, albeit against modest projections. Market sentiment, however, displayed an increased willingness to penalize firms falling short of estimates, as investors scrutinized whether earnings could justify the previous six months of valuation expansion. US core inflation data outpaced expectations for the fourth consecutive month, with March figures revealing core inflation at 3.8% YoY, significantly surpassing the US Federal Reserve’s (Fed’s) 2% YoY target. Despite slightly below-anticipated personal consumption growth of 2.5%, the cornerstone of the US economy—the consumer—remained resilient, exhibiting healthy expansion. Throughout April, over half of S&P 500 companies reported 1Q24 earnings, with aggregate earnings soaring by 6% YoY, a notable beat against forecasts. Notably, Google’s parent company, Alphabet, witnessed an 8% (USD) surge in its share price following the release of its latest earnings report, showcasing the appeal of its AI-driven cloud solutions to clients.
UK:
April presented a prosperous outlook for the UK stock market, standing out as an outlier among major markets. The blue-chip FTSE-100 Index surged by 2.4% (GBP), marking a year-to-date (YTD) increase of 5.3% and repeatedly reaching all-time highs throughout the month. Notably, on April 29th, the index peaked at its highest level of 8,147.03. In March, UK inflation demonstrated a favourable trend, easing to 3.2% YoY from February’s 3.4% YoY, primarily attributed to a slowdown in food price growth. This decline marked the UK’s lowest inflation rate since September 2021, bringing it closer to alignment with the Bank of England’s target. Additionally, the UK’s composite Purchasing Managers’ Index (PMI) displayed robust expansion, reaching 54. This positive economic indicator was underpinned by improved growth prospects and inflation dynamics in the region, which helped offset the challenges posed by prolonged higher interest rates and geopolitical risks.
Europe:
In Europe, major equity markets closed lower in April as a raft of disappointing earnings weighed on investor sentiment. The MSCI Europe ex-UK Index fell by only 1.5% (EUR) in April. In economic data, March euro area inflation slowed to 2.4% from 2.6% YoY in February, while EU annual inflation came in at 2.6% in March, also down from 2.8% in February, according to Eurostat. Germany’s March inflation rate eased to 2.3% YoY vs February’s reading of 2.7%, while France’s March inflation slowed to 2.4% YoY vs February’s 3.0% print. The eurozone’s flash composite PMI (purchasing managers’ index) rose to 51.4 in April, significantly above the December recessionary level of 47.6,
Emerging Markets:
The MSCI Emerging Markets Index gained 0.40% (USD) for the month as emerging markets fared significantly better than their developed market peers in April as momentum in Chinese shares seems to have shifted (Hang Seng China Enterprises Index +8% MoM) after three years of dismal share price performance. China’s equity markets surprised on the upside as a series of measures announced by the government since mid-April to support the mainland and Hong Kong stock markets saw the Hang Seng and Shanghai Composite indices closing higher in April. China’s improving economic landscape, cheaper valuations and mainland investors putting money into Hong Kong to protect their portfolios from a weakening yuan combined to help resuscitate Chinese markets.
Asia:
Japanese equities gave up some of the gains that they had made over the last five months. Widening interest rate differentials between Japan and other developed market countries put downward pressure on the yen and increased investor concerns about the risk of imported inflation weakening domestic demand. The Nikkei declined by 4.9% in April 4.9%, although the index is still up 14.8% YTD. Japan’s March headline CPI decelerated to 2.7% YoY vs February’s 2.8% print, but the inflation rate has now exceeded the Bank of Japan target rate for two years. Core inflation, excluding food prices, was 2.6% in March compared with 2.8% in February.
South Africa:
In South Africa (SA), the JSE continued its March momentum in April as the FTSE JSE All Share Index rose by 2.1% (ZAR) for the month. Resources counters (Resi-10 +7.0% MoM/+6.5% YTD) were again the best performers on the local bourse, especially gold and platinum shares, which recorded solid gains for a second consecutive month, as share prices were bolstered by their perceived safe-haven status in an uncertain global environment. In economic data, SA’s March headline CPI printed softer at 5.3% YoY after February’s four-month high of 5.6% YoY. MoM, CPI rose 1.0% in March – unchanged from February. Core inflation (excluding food, fuel, and electricity) dropped to 4.9% YoY from 5% YoY in February. This latest print means that inflation has moved closer to the 4.5% midpoint of the SA Reserve Bank’s (SARB’s) target band of 3% to 6%,
Conclusion:
The month of May kicked off with a Federal Reserve meeting on the 1st, at which the board kept interest rates steady at 5.25%. We will continue to have pivotal economic data throughout the month, starting with the job’s numbers and the crucial CPI report on the 15th. Moving forward, April emphasized the ongoing challenge of persistent inflation, which we will vigilantly monitor and address in our portfolio management. Despite April’s market performance, we are encouraged by the positive earnings announcements from the majority of S&P 500 companies. Additionally, we observe a widening scope of market returns across various companies and asset classes, further enhancing our outlook. Our overarching strategy emphasises maintaining a balanced and diversified portfolio. We anticipate that as markets stabilise and interest rates adjust towards their historical averages, new investment opportunities will emerge. To capitalise on these moments, it’s crucial for us to stay adaptable and maintain a degree of liquidity. This approach involves our current 10.10% investment in short-term bonds in the iShares 1- 3 years, which we plan to reallocate into longer-term assets when favourable entry points present themselves.