Market update – March 2024
Record highs in the US and Japan and fiscal challenges in the UK.
New highs but less froth
US equities have risen by around 7% so far this year and now exceed their 2021 peak by a similar amount. In many ways, US market dynamics look healthier than they did back then. The very strong performance of the “Magnificent 7” has led to some concern that the market is experiencing another tech bubble. However, for the most part, these huge companies have the earnings growth to justify their performance and their valuations are not extreme. The rally has also been broadening out in recent months. Since October, the other 493 companies in the S&P500 have risen by just over 20%. It’s a very different picture to 2021, when a wave of retail money inflated the share prices of companies with little prospect of profitability, as well as SPACs, meme stock and cryptocurrencies. Investing at all-time highs often feels uncomfortable. However, historical data suggests that record highs in the US market have generally not been associated with lower future returns, as we explore here.
The Nikkei regains its 1989 peak
After 34 years, Japan’s Nikkei index is also making new highs. Japanese stocks are up by almost 20% in 2024 and 45% over the past twelve months (in yen terms). Despite the very strong recent performance, the longer-term track record remains underwhelming. In the time it has taken the Nikkei to get back to its 1989 peak, the S&P500 has risen 14-fold and even the FTSE100 has more than tripled. There is reason to be more optimistic about the future, however. After decades of flirting with deflation, Japan’s inflation rate has been above 2% for almost two years now, encouraging businesses and consumers to spend. Meanwhile, corporate balance sheets are healthy, earnings are growing, and valuations look attractive. This suggests the relatively strong performance could continue, even if markets pause for breath in the short term.
UK Budget may offer little room for manoeuvre
Polling data suggests that last November’s Autumn Statement, which included a two-percentage point cut to the rate of National Insurance contributions, did not result in much political benefit for the Conservative party. It is still widely expected that the upcoming Budget will include “giveaways” designed to boost the party’s electoral appeal. However, the Chancellor may struggle to deliver tax cuts worth significantly more than last November’s, given that UK growth remains weak and public finances have not been moving in his favour. Tax cuts could also complicate efforts to bring down inflation. Even before any additional fiscal stimulus, the Bank of England expects inflation to rise in the second half of the year, after returning to target in the first half. This suggests that UK interest rate cuts could be limited. Schroders’ economists expect the UK Base Rate to end 2024 at 4.5%.
Positioning
Our overall equity exposure is broadly in line with our long-term strategic targets. Japanese equities remain a core overweight position and have boosted performance this year. We have also been increasing our exposure to US equities, given the resilience of the US economy, improving consumer confidence and a positive outlook for corporate earnings. We remain overweight fixed income, with a focus on shorter-duration bonds with less interest rate risk. We still see appeal in alternatives, which can provide valuable diversification benefits, but we have been trimming our exposure to take advantage of more attractive opportunities in equities and fixed income. High levels of inflation in the UK have made meeting inflation-plus return targets more challenging in the near term. Despite this, we remain confident in the ability to meet inflation-plus targets over the longer term.
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This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.
Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested.
This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements.
All data contained within this document is sourced from Cazenove Capital unless otherwise stated.
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