Market update for clients - April 2024

Hello. I'm Andy Miller, lead investment director at Quilter. Today, I'm joined by our investment strategist, Lindsay James. Over the next few minutes, we'll be discussing the performance of global markets and the outlook for markets and the wider economy.

So Lindsay, if we look at how markets performed over the course of the first quarter this year, we have equities, stocks, and shares, and they perform quite differently from fixed interest, so debt both of governments and companies. What what caused that divergence?

Yes. That's right. So we have seen strong performance coming through from the equity markets. Really across the spectrum, we've had the US offering double digit returns, Europe up around seven percent. But, conversely, as you mentioned, the bond market has been a little bit weaker. Now the reason for this is really due to the factors that have been driving markets. They've been driven predominantly by better than expected economic growth coming through. And in that situation, it's quite normal to see that sort of divergence in returns.

Added to that, we've seen a little bit of a return to expectations of interest rates staying higher for longer, particularly in the US. And in that sort of scenario of of slightly higher interest rates, it's like slower pace of cuts coming through, then that's also a headwind for bond markets. But I think we need to embrace the fact that, really, the underlying driver has been better economic growth, and that's really the ideal driver of financial markets in any scenario.

Thank you, Lindsay. And couple of things have been hitting the headlines or are perennially hit hitting the headlines, and I'd like to just discuss a little of the effects that they can have on markets. And when we're talking about geopolitics here, the first thing is the situation we have in the Middle East, which is primarily a human humanitarian catastrophe. I think we would recognize that, but it does have economic consequences. And the second thing is he's never far from the headlines, Donald Trump, the likelihood of him being reelected president and what effect that might have on investments.

Yes. Well, first of all, if we look at the Middle East. Now as investors, we're going to look at this through the lens of oil prices. That's its main conduit into financial markets. And here there's a few factors. First of all, the better economic growth I've referred to is one of the reasons oil prices have been moving up.

Another factor is, of course, the uncertainty about future supply coming out of the Middle East. Now here, yes, there's certainly different expectations of how this could play out. When we look at the current backdrop, I think it looks like in all probability, this will have a limited scope. But even in that eventuality, I don't necessarily see oil prices coming down significantly because we have sources of growth of demands that weren't there a year ago.

Also, I think another factor is that OPEC plus have been deliberately limiting oil supply into markets in order to shore up prices given they had been weak really for much of the last eighteen months. Now they will be reviewing that in the coming months, and we might see more supply coming on stream because it's in their interest to see economic growth continuing to move forward. So, overall, I have limited concern about the impact of oil prices on the economy at this point in time.

When we look at elections, now we're seven months away from the US presidential election. At that point, polls are not necessarily completely accurate, but the polls are also telling us that Donald Trump has quite a significant lead in the swing states. And so if he wins those swing states, he'll win the White House. I don't necessarily see that as being a long term negative for the US equity market, and that's partly because he's likely to continue the tax cuts that he introduced in his previous term.

He is potentially likely to seek more of a with China rather than worsening relations there. He's historically got on quite well with those authoritarian regimes and may seek to be seen as the dealmaker too. I think when it comes to the US deficit as well, that's not necessarily an immediate concern, partly because we're still seeing very strong demand for US government bonds coming through. So, overall, we still need to wait and see how the next seven months plays out, but I don't see it as a as a particular reason to be more cautious on US equities at this point in time.

Thank you, Lindsay. So politics does have an effect on investment markets and ultimately investment returns. Actually, the major driver that we're seeing is interest rates, central bank policy, and what's really driving that is expectations around inflation. Can you tell us a bit more about that? Yeah. Sure. So we've had a bit of a divergent, divergence in direction in inflation between the US and then the UK and Europe. In the US, it's been coming down more slowly than the market was expecting.

That's meant the Federal Reserve has had to come out and say, look. We can't consider interest rate cuts while inflation is at this level. Now it's at this high level because demand has been very strong in the economy, so not necessarily a big cause for concern. And when we look historically at the performance of US equities when interest rates have been high, like in the second half of the nineteen nineties, we've still seen very strong equity market performance coming through despite higher interest rates.

So I think we're relatively comfortable about what's driving those inflation rates in the US. When we look at the UK and Europe, inflation has been coming down much closer to that target level, and it's expected to get to that two percent level in the UK some point in the second quarter before potentially accelerating a little bit in the second half of the year. But it certainly looks to me like the Bank of England are now in a position to seriously consider interest rate cuts as we move into the the second half of the year.

Now I think that will have a a supportive, force on the UK economy to some degree, but those rate cuts are likely to be pretty slow. And, ultimately, they're going to settle at a much higher rate than we've seen in previous decades. So some more headwinds to come really for for the UK economy, although perhaps lessening a little bit.

Thank you, Lindsay, and thank you very much for your time. I hope you found it useful. If you have any questions about what we've discussed today, please contact your financial adviser.