SSFS Market Commentary – Q1 2024
Q1 Inflation and monetary policy update:
Despite entering a soft technical recession in 2023, the outcome of the UK economy is dependent on the MPCs reaction to the possibility to enter recession, stagflation or a soft-landing later in the year. At the beginning of 2024, inflation (measured by the Consumer Price Index (CPI) stood at 4%, which later decreased to 3.4%. As inflation continues to fall, the UK economy is preparing for a potential ‘soft landing’. As a result of this, the UK Monetary Policy Committee (MPC) are expected to gradually reduce interest rates, until inflation reaches the Bank of England’s target of 2%. However, possible scenarios for the UK economy include:
Soft Landing: Where there is slight positive economic growth and a robust labour market. Inflation is projected to range between 2.5% to 3.5% and interest rates are expected to be cut 2-3 times by the end of 2024.
Stagflation: This scenario entails little economic growth alongside persistent inflation. This will cause uncertainty for the MPC as interest rate changes will become increasingly sensitive.
Recession: 2 consecutive quarters of negative economic growth. This will encourage central banks to reduce interest rates to stimulate the economy.
The Bank of England anticipates that inflation will revert to its 2% target for the first time in three years by the second quarter of this year. However, it foresees inflation creeping back up towards 3% later in the year as the effects of lower energy prices diminish. Meanwhile, Germany’s ongoing recession has presented additional issues as the UK’s major trading partner could cause a knock-on economic slowdown effect. The Monetary Policy Committee (MPC) is scheduled to convene next on 9th May to address the economic conundrum. It is widely expected that they will respond to easing inflationary pressures.
US & Eurozone
Furthermore, international factors such as decisions made by the European Central Bank (ECB) and the United States Federal Reserve (US Fed) will likely influence the UK’s economic trajectory. Markets expect the US Fed to ease more than the ECB in 2024, but a weak euro economy, and falling inflation, may see the opposite occur.
The US economy is performing well despite significant monetary tightening from the Federal Reserve. Recent data reveals a 3% increase in real Gross Domestic Product (GDP) compared to the previous year’s third quarter. However, there is a tangible risk that the robust economic performance may prolong higher inflation rates beyond the Fed’s current projections. Thus, the Fed will experience the delayed impacts of their interest rate hikes and potentially lead the US economy into recession as resilient labour market drive rates higher for longer.
Are interest rates the only story in town?
Interest rates have an impact on all asset classes. For example, higher interest rates can negatively affect some equities, because it can mean higher costs of capital for businesses and higher debt servicing costs. Typically, where reduced interest rates are expected, bond yields would fall. Bond yields and equity prices have historically had an inverse relationship (i.e. when one rises, the other falls) due to consistently shifting market conditions.
Most equity-based investments have seen positive growth over the last quarter, due to falling interest rate expectations later in the year. Companies with large market capitalisations (or ‘Mega Cap’ companies) have been performing well in the US, as can be seen by the performance achieved by the S&P 500 Index (the 500 largest companies listed on a US stock exchange) versus the Russell 1000 Index (another US index including large-cap and mid-cap stocks). It also appears that growth companies are continuing to outperform value companies, due to the continued impact of US tech stocks.
The best performing market of the first quarter of 2024 was Japan. Japanese equities have outperformed US equities in the first quarter of 2024 by circa 2%. This is largely attributed to Japan having seen its first bout of inflation in the last ten years and also having raised interest rates for the first time in 17 years. In addition, we have seen the Yen to weaken to near 34-year lows.
The outperformance of equities has been supported by key factors such as their recent 41-year high CPI inflation and corporate governance reforms. In addition, the Bank of Japan has shown they are prepared to expand their money supply to help boost economic growth. A main concern of investors is a return to deflation for Japan whilst energy price shocks may help prevent this.
Other areas effecting markets
The Bank of China forecasted year-on-year GDP growth for the first quarter of approximately 4.8%, compared to 5.2% in Q4/2023. However, a Reuters poll suggests that this number is closer to 4.6% as Chinese publications have historically been heavily censored. However, there is still ‘sticky’ inflation and high interest rates in most counties, which could have caused stagnant demand for Chinese exports. According to BlackRock, Chinese equities are down by 3.1% for the year to 29th February 2024. This may be due to negative market sentiment, as China’s property market is still declining, and their geopolitical issues are likely to sustain.
Gold has traditionally been used as an inflation hedge, however, surprisingly, whilst inflation has eased, gold has rallied due to Central Bank purchasing more gold to bolster their reserves. Historically, when investors worry about the loss of value in other asset classes or lose in trust in currency, they move money into gold, viewing it as a ‘safe haven’, thus, stimulating demand as gold hit all-time highs in 2024. The increase in price has been driven by various different factors, including investor uncertainty due to conflicts and major political issues.
Elsewhere in the market, the price of cocoa rose significantly from $5,165.6 on 2nd January 2024 to $9,579.6 on 28th March 2024. This is due to a third consecutive year of supply deficits affected by numerous factors, including widespread cocoa-related disease; farmers not incentivised by good enough prices and a reduction in the yield of ageing trees. As a result, given cocoa is the primary ingredient in chocolate, price rises will invariably be passed on to consumers.
Strategic Solutions’ Centralised Investment Proposition (CIP)
The table below has taken the average fund performances in each risk range:
| Risk Profile | Average
performance |
Highest performing | Lowest performing |
| Defensive | 1.26% | 2.44% | 0.58% |
| Cautious | 2.50% | 3.52% | 1.73% |
| Balanced | 3.96% | 5.91% | 2.57% |
| Moderately Adventurous | 5.05% | 6.74% | 3.42% |
| Adventurous | 6.36% | 9.30% | 3.90% |
| FTSE 100 (UK) | 3.99% | ||
| S&P 500 (US) | 11.45% | ||
| Nikkei 225 (JPY) | 13.40% | ||
The L&G Multi Index range underperformed the rest of our investment strategies across most risk ranges due to their active positioning in the current market. Although they do hold a long-term positive view on technology stocks, they have limited their US exposure in favour of a broader and unconcentrated strategy given the recent market turbulence. Additionally, they have taken more government bond exposure due to their positive outlook on duration and growth opportunities. However, this long-term position has caused some short-term volatility given the recent lengthened expectations of high inflation and interest rates.
The HSBC Global Strategy range has outperformed the rest of our investment strategies across most risk ranges. The strong performance in equity markets has largely been reflected in their portfolios given the recent outperformance and HSBCs overweight position in global equities. Their investment approach naturally underweights the UK market in contrast to their peers and as such, they were less exposed to the underwhelming Q1 performance of UK equities. Lastly, they increased their exposure to Japanese equities at the expense of global property markets. This is a decision that paid off given the recent rally in Japanese markets and underperformance in property markets.
Strategic Solutions’ outlook:
Overall, the start to 2024 has been rewarding for investors as equity markets have flourished under the continued notion of falling inflation and rate cuts potentially on the horizon. This is reflected in the table above as many of our strategies have performed well given their natural bias towards the North American market. Despite underperformance in the UK, portfolios have still generated positive returns as most assets have appreciated over the quarter. However, the risk of volatility is ever-present as there are geopolitical tensions; downward pressures on developed economies and political events still having the capability to cause turbulence as the potential for a soft-landing derails. Therefore, keeping a balanced and well diversified portfolio is essential to navigate the potential volatility expected this year. We are confident that all our strategies are well positioned for the markets ahead.
If you have any immediate concerns surrounding anything written in this commentary or would like to further understand anything discussed in our investment reports, please contact your adviser. Otherwise, we look forward to seeing you in our next meeting.
