Source: Platinum Portfolios Quarterly Newsletter (Q1 2024)
Global stock markets registered strong gains in Q1 2024 buoyed by a resilient US economy and continued enthusiasm around Artificial Intelligence (AI). Expectations of interest rate cuts also boosted shares, although the pace of cuts is likely to be slower than the market had hoped for at the beginning of the year. Bonds saw negative returns in the quarter.
United States: Despite facing significant challenges in 2023, the US economy defied recession forecasts by maintaining a robust growth rate of 3.2% in the fourth quarter. Inflation, mean-while, continued its descent towards the Federal Reserve’s 2% target, but at a slower pace in recent months. Expectations for moderate job gains and easing inflation set the stage for a soft landing for the US economy in 2024. However, as cyclical tailwinds subside and the antici-pation of the US election looms, risks to economic stability persist.
While the Federal Reserve opted to keep rates steady at 5.25-5.5% in its March meeting, the updated dot plot signalled a cautious approach to rate cuts. With only a slim majority of FOMC members anticipating up to three rate cuts in 2024 and a reduction in projected rate cuts for 2025, the Fed emphasized the gradual nature of future policy easing.
After an impressive 2023, U.S. equities have continued their upward momentum in the first quarter of 2024. In fact, resilient corporate profits and hopes for policy easing have produced multiple all-time market highs this year. However, market performance remains concentrated as the largest stocks in the index have continued to dominate. While valuations might look stretched, there are still many attractive opportunities outside of the Mega Cap stocks.
Eurozone: Eurozone shares witnessed robust gains in Q1. Signs of improving business activity emerged, accompanied by a cooling inflation rate, which stood at 2.6% in February, down from 2.8% in January. Despite speculation, European Central Bank President Christine Lagarde downplayed the likelihood of an imminent interest rate cut, emphasizing the bank’s cautious stance.
Japan: The Japanese equity market experienced an extraordinary rally, with the TOPIX Total Return index soaring by 18.1% in Japanese yen terms. Foreign investors played a pivotal role in driving this rally, fuelled by optimism over Japan’s positive economic cycle characterized by mild inflation and wage growth. Notably, the Nikkei surpassed the 40,000-yen level. Corpo-rate earnings in Japan exceeded expectations, with positive revisions for both the current and next fiscal years. The weakening yen provided support, while the inflationary environ-ment boded well for companies with pricing power. The Bank of Japan’s decision to set a short-term rate above zero underscored confidence in Japan’s economic trajectory.
Looking forward to the rest of the year, we face uncertain times, however, favourable funda-mentals outside of major stocks are expected to bolster broader equity market performance, while fixed income assets will continue to serve their traditional role of income generation and diversification.