Global stock markets have ushered in 2024 continuing their strong performance from last year, with notable gains in both US and European stocks during the first quarter. The MSCI AC World index posted a 9.5% return in the first quarter, measured in sterling. This continued rally since October is particularly noteworthy given recent reductions in market expectations for interest rate cuts this year, which has limited gains in fixed interest investments, with gilt benchmarks down by 1.8% year-to-date.
US stocks have led the charge over the past six months, fueled by a solid job market, robust economic growth, and heightened enthusiasm for Artificial Intelligence (AI) stocks. Inflation has stabilized, with the US consumer price index (CPI) maintaining a range of 3%-4% annually over the past ten months, a significant drop from a peak of 9.1% in 2022. Although this is generally positive, inflation's persistence above the Federal Reserve's 2% target has delayed any potential interest rate cuts. Gold has benefited in this environment, climbing 8.1% this quarter in sterling terms and reaching new highs in US dollars. Additionally, Brent crude oil prices have surged 21% year-to-date, nearing US$90 per barrel.
Recently, the market focus seems to have shifted from strict monetary policy to a broader consideration of economic indicators that suggest a possible "soft landing." Despite predictions of economic downturns due to steep hikes in central bank rates, the economies, particularly in the US and UK, have performed better than expected. The US emerged as the fastest-growing advanced economy in 2023 with a 2.5% GDP growth.
In the first quarter, US stocks continued their strong performance, with the MSCI North America index up by 11.4% in sterling terms. Market volatility has decreased, indicating stable conditions despite the change in expectations for rate cuts and looming political risks.
While the UK experienced a slight recession in the latter half of last year, it still managed a 0.1% GDP growth in 2023. The Eurozone, although facing challenges, achieved a 0.5% GDP growth. These outcomes, better than anticipated under high interest rates, have been favorable for central bankers. Previously caught between rising inflation and the threat of severe recessions, they now find themselves in a more advantageous position, able to maintain current restrictive rates to control inflation. Central banks are prepared to act quickly if needed, with the Fed and BoE holding rates steady at historically high levels since mid-2023.
The preference among investors for growth stocks, particularly in the US, over value stocks has widened the valuation gap between the US and UK markets, although some UK stocks now appear attractively priced based on various financial metrics. This valuation disparity, while partly justified, is increasingly becoming excessive, yet it opens up attractive investment opportunities in the UK market.