May '24 Market Report

Last month, markets experienced a shift in pace, with stock sell-offs as investors processed earnings results, mixed economic data, and a cooling bullish sentiment that had dominated the past six months.

After a strong performance in global equity markets during the last quarter of 2023 and the first of 2024-with the MSCI World rising 17.2%-investors reassessed the sustainability of a rally driven by expectations of substantial interest rate cuts this year. These cuts now seem less likely as 2024 progresses. The MSCI AC World Index returned -2.4% in April in sterling terms, but remains up +6.9% year-to-date.

Diversified investors found some relief in the better performance of UK equities, which mirrored the relative outperformance seen in 2022 when risk sentiment was less favorable. The MSCI UK index returned 2.8% in April, while Europe ex UK and North American equivalents were negative.

Miners and oil companies bolstered this relative strength, even as news of Sydney-listed BHP Billiton's bid for Anglo American suggested the UK market might lose a significant player. This could, however, prompt action on the longstanding issues affecting the UK market's competitiveness, contributing to its long-term underperformance. Chancellor Jeremy Hunt has cautioned that the FCA's public 'name and shame' approach might be excessive, signaling a potential move to address corporate concerns about listing in London.

In the US, many benchmarks, including large-cap stocks, ended a three-week losing streak in April, buoyed by strong first-quarter earnings, especially among mega-cap tech stocks. The US markets have led the upswing since October, so some consolidation is not overly concerning.

The US tech sector continued to drive market gains, with significant performances from industry giants. Alphabet (Google) saw its share prices soar after exceeding first-quarter earnings expectations and announcing its first dividend. Netflix also reported strong results, with operational income up 54% and a notable addition of 9.3 million subscribers globally in the first quarter.

Fed Chair Jerome Powell maintained a balanced stance on interest rates, citing ongoing economic strength as a reason against cuts while pushing back on rate hikes. Powell's dismissal of speculation about higher rates reassured markets, though he provided little to please those hoping for immediate policy easing.

Overall, the Fed appears content with current rate levels, considering them suitable for an economy sending mixed signals. This likely means greater data dependence for market participants, with doves seeking signs of economic weakness, such as the April ISM manufacturing PMI slipping into contraction, while hawks will focus on hints that inflation may continue to rise.

In the UK, inflation remains a concern, but April brought some positive news. Shop price inflation slowed to 0.8%, down from 1.3% in March and below the three-month average of 1.4%, marking the lowest retail inflation rate since December 2021. This provides some relief to the Bank of England, which faces pressure to cut interest rates, currently at 5.25%.

Mainland Europe also saw improving inflation dynamics. In the eurozone, price pressures held at 2.4% in April, with core inflation, excluding energy and food, dropping from 2.9% to 2.7%.

While US growth appears to be slowing, the eurozone economy exceeded expectations with a 0.3% GDP rise in the first quarter, the strongest expansion since Q3 2022. This growth is largely driven by Germany's economic rebound, which saw 0.2% growth after a decline. The MSCI Europe ex UK benchmark fell 1.9% in April, faring slightly better than global stocks weighed down by a -3.2% return from North America.

Fixed income markets were largely negative in April due to reduced expectations for interest rate cuts. A broad gilt index returned -3.2%, with long-end (15-year+ gilts: -5.7%) and index-linked gilts (-3.6%) underperforming. This trend continues year-to-date, as bonds more sensitive to rate changes have struggled with fewer anticipated cuts.

Inflation in the UK and Europe appears to be approaching target levels. While more stubborn in the US, signs of economic cooling could help ease price pressures.