Global stock markets have enjoyed a bright start to 2024, building on substantial returns in 2023. Early last year pessimism reigned supreme, and the pleasing market returns since have largely been a result of the alleviation of doom and gloom, rather than major positive developments. If anything, there have been several adverse shocks — US regional banking collapses, Credit Suisse failing and the outbreak of the Israel-Hamas war — but despite this, the MSCI All Country World Index is up firmly in the first quarter after delivering an 18% return in 2023, in sterling terms.
The last 18 months have reiterated the message on the importance of maintaining a long-term perspective to investment goals, serving as a reminder that equity markets look forward to the extent that attractive returns can be achieved before an upturn in corporate and economic activity has been delivered.
The US stock market has been the standout performer, boosted by a handful of large tech companies at the forefront of Artificial Intelligence (AI). The performance of Alphabet (formerly Google), Amazon, Apple, Meta (formerly Facebook), Microsoft, Nvidia and Tesla have underpinned not only US benchmark returns, but also global indices due to their large weighting to the US (approximately 60%). US stocks ended 2023 20% higher, in sterling terms, with the aforementioned so-called “magnificent seven” tech companies responsible for roughly half the return and leaving 72% of stocks underperforming the benchmark. These firms have a collective weighting of around a sixth of the MSCI All Country World Index, a larger proportion than the cumulative weighting for all UK, French, Japanese and Chinese stocks!
This is seen in some quarters as posing a systemic risk, with the hype around AI likened to the tech-driven dotcom bubble which infamously burst in 2000. While we are aware of these views and continue to monitor developments closely, we do not currently subscribe to them. The size, scope and dominant market position these firms occupy, along with their existing operations mean they are ideally placed and unlike the .com bubble there are significant barriers to entry in the AI space and established companies.
UK stocks continue to lag not only US peers, but also their European counterparts. A higher representation of value stocks at the expense of growth and a greater proportion of unloved sectors has weighed on UK benchmarks. Concerns around the Chinese economy have also provided a headwind.
The last mile?
Measures of inflation in the UK, US and Eurozone have fallen substantially from their cycle highs but remain comfortably above central bank targets. Heading into 2024 there were high hopes for a substantial lowering of key central bank base rates this year, but these forecasts have since been walked back somewhat. After being too slow to react to rising inflation, there remains a concern among rate setters that they may declare victory too soon, before high inflation has been fully curbed.
While economic growth has been fairly tepid — US aside — overall levels of activity are faring far better than many feared in the face of higher interest rates. The resilience of consumers has surprised to the upside and with labour market figures displaying ongoing strength at the start of 2024, there is a growing feeling that a so-call “soft landing” is in sight, if not already here.
After a tumultuous 2022, UK fixed income provided positive returns as the BoE paused its hiking cycle and interest rate markets began pricing in reductions from the middle of this year. Corporate bonds did best, thanks to the economy holding up better than expected.
Known unknowns
We remain positive on equities as a central feature driving long-term returns but are mindful of the size of the gains since October 2023. Valuations and sentiment indicators are starting to get stretched towards the upper end of ranges. There is currently a fair amount of good news in the price and several potential risks on the horizon.
From a macroeconomic point of view the key focus will be on central banks and how they approach reducing interest rates. Inflation seems to be moving in the right direction but the ongoing conflicts in the Middle East and Ukraine, as well as a rising oil price pose potential threats. As does tight labour markets and strong wage growth.
UK and US politics will dominate the headlines in 2024, with a fair amount of uncertainty as to what new governments will bring. At Quilter Cheviot we stand ready to react to the latest developments but will not lose sight of our investment philosophy, looking through short-term noise to focus on the long-term and delivering the best results for our clients.
