• ‘No landing’ scenario for the US over-optimistic in our view
• Should the Fed cut interest rates?
• Profit-taking on Japanese equity overweight

The global stock market rally continued in March, with the MSCI All Country World Index rising for the fifth consecutive month, with a monthly return of 3.1% and a quarterly return of 8.2%. In fact, the Nikkei (+4.2%) - as well as the S&P 500 (+3.2%) - both rose to fresh record highs in March. Unlike in the previous months, the rally in March was more balanced and less driven by the dominance of tech stocks. The MSCI Eurozone showed strong performance (+4.4%) thanks to tailwinds from expected rate cuts and cautiously improving global economic conditions. Meanwhile, Chinese equities - which last month led their global counterparts in terms of returns - lagged amid an underwhelming stimulus announcement at the National People’s Congress.

Sovereign bonds saw positive returns in March, with the Bloomberg US Treasury Index and the Pan-European Index increasing by 0.6% and 1%, respectively. However, these gains only partially offset earlier losses, as hotter than expected US inflation data led to negative total returns of -2.1% for bonds for the quarter (Bloomberg Global Aggregate Index). Within corporate credit, European (+1.6%) and US high yield (+1.5%) outperformed investment grade credit in the first quarter, thanks to its lower interest rate sensitivity and the overall higher risk appetite among market participants. Emerging market debt saw a quarterly return of 1.4%, as the advantage of high real yields compensated for the negative effects of a strengthening US dollar.

While the equity rally of 2023 was largely driven by lower yields, which were a result of hopes of a central bank pivot, this year’s rally has mainly been fueled by robust company earnings and encouraging macroeconomic data. Market participants have generally dismissed discouraging data and stern commentary from central bankers, despite some initial negative reactions. Investors anticipate that disinflation will persist and that central banks will begin rate cuts in the second half of 2024. Additionally, they are accounting for a mild and short-lived slowdown in the global economy, which they expect to be followed by a swift recovery. This explains why the rally in March also spread to growth-sensitive sectors.

Recent disappointing (higher) inflation data had raised concerns about the trajectory of U.S. inflation, making the steady core Personal Consumption Expenditures (PCE) Price Index for March a welcome development. The Fed’s preferred inflation gauge held steady at 2.8% year-over-year. U.S. Federal Reserve Chair Jay Powell endorsed this outcome, stating it aligned closely with what was anticipated. Powell also reiterated his expectation for inflation to decrease toward 2 percent, albeit through a potentially uneven journey. In the meantime, the midterm inflation expectations of consumers remain well-anchored at 2.8% (University of Michigan survey). Eurozone and UK inflation saw substantial improvement in March. Registered at 2.4%, Eurozone annual inflation is within striking distance of the ECB’s 2% target. The Swiss National Bank initiated the global rate-cutting cycle unexpectedly, becoming the first developed country's central bank to relax monetary policy since the COVID-19 pandemic.

The last few weeks have seen a series of encouraging economic indicators from the US, all pointing to a manufacturing revival and reducing the likelihood of an imminent recession. For the first time since September 2022, the ISM Manufacturing PMI moved into expansion territory, job openings increased in February, and growth in nonfarm payroll employment picked up in March. The Atlanta Fed's GDPNow model estimates first-quarter GDP growth at 2.5%, up from 2.0% in mid-March. Economists are also revising their U.S. GDP growth projections for 2024 upward. The stronger ISM manufacturing PMI corroborates the signal from several other indicators suggesting that the global manufacturing cycle is stabilizing. Both the NBS and the Caixin manufacturing PMIs for China surprised to the upside as well. The higher Ifo - reading for Germany also suggests that economic conditions are bottoming, and that anticipations of lower inflation and interest rate cuts are boosting business and consumer sentiment.

Robust economic conditions have raised investors’ concern that the Fed will delay policy easing and deliver fewer rate cuts this year, causing the 10-year Treasury yield to rise to 4.4%, its highest level since November 2023. The ISM manufacturing PMI data for the US received a negative response from the markets. Indeed, the price sub-index increased, primarily influenced by the often-volatile commodity prices. Additionally, while the employment sub-index showed improvement, it continues to be lackluster. Furthermore, the longer-term trend of the forward-looking openings, quits and hiring rates continues to point to a deceleration in wage growth ahead and the leading NFIB hiring plans indicator remains on a well-established downtrend. Investors will be closely watching the next reports to see if the labor market is powering ahead, or if the data is beginning to show a sustained slowdown.

We anticipate that decreasing inflation, positive economic growth, lower interest rates, and rising corporate earnings will provide a conducive environment for stock markets. However, optimism is already elevated, making them vulnerable to profit-taking. As a result, we maintain a neutral stance on global equities. After the strong performance of Japanese equities, we are taking profits and reduce Japan to its benchmark weight. As always, the market faces various risks from economic, monetary, and political factors that could spark volatility. Geopolitics are also adding to the wall of worry, with the price of WTI crude oil passing USD 85 on concerns that tensions between Israel and Iran are heating up again. Therefore, it’s crucial to maintain a well-diversified portfolio. Fortunately, investors currently have a wide range of options to diversify and enhance the resilience of their portfolios.

Please find attached our last Asset Allocation Update for April.