Nutmeg investor update: April 2024

March was another positive month for investment markets in both equities and bonds. What were the numbers behind this?

Overall March was a good month for financial market returns, with equity assets adding to what was already a strong start to 2024.

Global equities rose 3.3% in sterling terms, with the largest equity market, the US, rising by a similar amount on aggregate. US smaller companies were up close to 4%. Japanese equities also delivered a similar level of return, and the country retained its place as the star performer so far in 2024. 

Closer to home, it was good to see the FTSE 100 deliver a strong month after trailing its European peers recently, generating almost 5% in March. This was helped by strong performance from the energy sector, a significant part of the UK equity index, on the back of positive oil price dynamics.

While marginally behind the UK, performance for broader European markets remained strong at around 4.4%, pushed higher by semiconductor supplier ASML in the Netherlands and pharmaceutical giant Novo Nordisk in Denmark.

In emerging markets, China continued to lag, but this was largely offset by the outperformance of other Asian countries like Taiwan and South Korea. 

On the fixed Income side, there were broadly positive returns across Western government and corporate bond markets. Headline market returns were strongest in UK gilts, where the release of lower than expected UK inflation numbers eased some of the worries around the threat of more persistent price rises.

That leaves most major corporate bond markets in positive territory for the year, though broader government bond indices are still experiencing muted losses in 2024, despite a better month in March. 

Questions around when central banks in the US, UK and Europe will cut interest rates continue to be a hot topic. Where do we stand today? 

Determining when central banks will begin to ease interest rates in this economic cycle remains a key market dynamic for both equities and bonds.

In the US, we saw inflation that slightly surprised on the upside. US core inflation for the 12 months to February came in at 3.8%, versus an expectation of 3.7%. While still lower than the previous month, it adds to the uncertainty regarding future rate cuts by the US Federal Reserve, a key support for positive equity returns recently.

While markets have moved to discount a US recession in 2024, the resultant expectations of stronger economic growth will keep central banks and investors alike wary of the inflation implications. 

In the UK, the situation differed as inflation, while still elevated, surprised on the downside i.e. it was lower than expected. This could potentially be seen as good news for future rate cuts and this was echoed in the subsequent Bank of England Monetary Policy Committee meeting, with members voting as a whole to maintain the current status quo, with some in favour of a cut. This was in contrast to the previous month when two out of eight members wanted to increase rates.

Has the economic data your team watches on a daily basis remained supportive for markets?

Yes, we see broader economic conditions as fairly robust, especially in the US, where GDP growth seems on track for a 2% to 2.5% increase this year. This is a big contrast to the potential recession that many had feared at the beginning of the year.

An example is the employment situation in the US, with extremely strong payroll numbers for February, significantly surpassing expectations. This underscores the dynamism of the US economy, which continues to surprise positively.

Additionally, opinion-based measures, such as purchasing manager indicators, which are monthly surveys on the health of the industrial and services sectors, have also been improving outside of the US, in the UK, Europe, and Japan.

With many emerging markets, outside of China, also seeing green shoots in their economic picture, the narrative is increasingly one of momentum towards a more robust global growth picture. 

Japan has been a strong performer this year. What's been behind the fresh interest in this market?

Absolutely, after decades of muted enthusiasm, there has been a renewed level of interest in Japan over the last 12 months, and this is for several reasons.

First and foremost, inflation has returned to the country, a stark contrast to its recent history. Since the 1990s, the Japanese Government and the Bank of Japan have made numerous attempts to revive inflation, which had remained persistently low.

The most recent consumer price index (CPI) number (excluding food and energy) for the 12 months to February was 2.8%. If we exclude the past six months, this is a figure not seen since 1992 in Japan. The resurgence of inflation is more than welcome to revitalise the country's economy and dynamism - after all, some inflation is a positive thing for all economies, so long as it doesn't exceed targets.

Secondly, the Bank of Japan's policy of keeping interest rates at zero or marginally below zero, despite significant increases in other developed markets, has led to a substantial decline in the Japanese yen over the last 24 months against most major currencies, especially the US dollar.

This continues to help the local equity market, as the weak currency directly benefits Japanese corporations by making their prices cheaper in foreign currency terms, and so favouring exporters and those with foreign revenue streams.

Finally, the difficulties seen in China following the Covid recovery indirectly favour Japan. Japan is now back on the radar screen of foreign companies looking to establish a strong presence in the Asia Pacific region, and with regulatory changes having also brought about greater corporate governance and focus on shareholder value, companies have been encouraged to look again at the Japanese economy. 

Within the Nutmeg portfolios, we have had an overweight position in Japan for the past six months and continue to take a favourable view for the near term.

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