• Equity markets set new records
• Cuts to interest rates pushed back
• Position in US government bonds reduced in favour of Eurozone

Following a tentative upward movement in January, the sentiment across global equity markets improved significantly in February, with gains seen across all the principal regions. The MSCI All Country World Index posted a total return of 4.3% for the month, with the Nikkei 225 (+4.9%) and the S&P 500 (+5.3%) both reaching new all-time highs. Chinese stocks outperformed their international counterparts, rising 8.6% as Beijing announced several supportive measures.

 

This positive trend in global markets occurred despite concerns about the Fed's predicted pace of rate cuts, particularly following a higher-than-expected inflation rate, as measured by the US CPI (3.1%), in January. Fixed income markets came under pressure as markets scaled back hopes for early and swift rate cuts from the Fed (Bloomberg US Treasury Index: -1.3%). Yields in the Eurozone experienced a similar uptick as well. We suspect that the interest rate adjustment is nearly over. The latest inflation print kept the disinflationary trend intact, as the closely observed personal consumption expenditure (PCE) numbers fell right in line with expectations.

 

The market has aligned with the median estimate in the Federal Reserve's December Summary of Economic Projections, which projected three cuts would be suitable this year. As recently as mid-January, the Fed funds futures market had more than six cuts discounted. Additionally, expectations for European Central Bank (ECB) rate cuts have been scaled back to approximately 95 basis points, down from 160 basis points at the end of January and 190 basis points in late 2023.

 

While consensus has moved to our level of skepticism, the market shrugged off the recent rise in yields as investors focused on earnings rather than inflation.The Fed is effectively on hold, and recent data hardly suggest an economy in need of a boost from easier monetary policy. Employment remains near historic lows, hiring is still strong, and wages have been rising, helping to fuel continued consumer spending. The latest business activity survey readings were mixed but have been consistent with a soft landing for the US economy, and the latest labor market data provided some evidence that conditions are cooling. The data do not point to an imminent recession. The economy runs neither to cold nor to hot.

 

Given these dynamics, we have opted to maintain our neutral stance on equities. Within our equity allocation, we have an overweight position in Japan, where the economic cycle, profit developments, and expansive monetary policy present a favorable backdrop for stocks. Conversely, we are underweight in Europe, where economic growth continues to lag. With our recent shift to a neutral position on US equities, we see this as an opportune moment to rebalance our dollar exposure to a neutral level. Our reallocation from short-term US Treasuries to Eurozone government bonds capitalizes on the increased attractiveness of Eurozone bonds following recent interest rate increases, bringing us closer to expectations for declining rates through 2024.

 

Please find attached our last Asset Allocation Update for March.