IN FOCUS6-8 min read

Q1 2024: review and outlook

Equities continued to move higher, despite rising bond yields.

Q1 review article image


Josh Barber
Investment Manager

We entered 2024 with markets continuing to rally, lifted by the Federal Reserve’s dovish rhetoric in the final quarter of 2023. Markets interpreted the Fed’s apparent shift in stance as a sign they may cut rates up to seven times this year, although this looked a little optimistic to us and expectations have since moderated.

Equity markets continued to rise through Q1, leaving global equities up 9.3%1 YTD. Markets were boosted by strong results, and positive guidance, from the tech sector. Demand for artificial intelligence (AI) has been gathering pace, with tech companies the major beneficiaries so far. Nvidia has been at the forefront of the rally, given its position as a leading designer of chips that enable this technology. The stock is the second-best performer in the US market so far this year, having risen 82.4%2 , and is rapidly closing in on Apple as the world’s second largest company by market capitalisation. Looking ahead, we believe there is scope for companies outside the tech sector to benefit as they adopt AI. The technology is now being deployed in consumer discretionary, healthcare, financials, and other more industrial areas of the market.

International equities

The UK stock market rose 4%3, driven by industrial companies such as BAE systems and Rolls Royce, up 20% and 40% respectively. Europe was up 7%4, with consumer discretionary stocks benefiting as luxury goods sales in Europe and Asia picked up. Emerging markets also performed positively over the quarter, with China the only major market performing negatively (although there are tentative signs of recovery). 

Japan has been the best performing region year to date, up 19.3%5 in local currency, and recently hitting its first all-time high since 1989. Japanese equities have benefited from a weak yen, given that many of its biggest companies, such as Toyota and Sony, are exporters. The weaker yen does mean that when returns are translated back to western currencies they are lower, but it has still outperformed other regions. Tailwinds that we identified in our 2024 outlook, such as corporate reform, have benefited shareholders with a noticeable uptick in buybacks and dividends helping to lift share prices.

Monetary policy

In a widely anticipated move, the Bank of Japan implemented its first interest rate hike in 17 years. This comes as confidence is growing that Japan is finally moving out of its multi-decade deflationary slump. It’s a very different backdrop to that faced by other developed markets, where inflation is still too high. Japanese wages have been rising at their fastest pace since 1991, giving consumers greater spending power and helping drive Japanese equities higher. The outlook remains positive, with corporate earnings strong and the market valued reasonably; at 15.9x6 price to earnings, it is around the 15-year average.

In another notable move, the Swiss National Bank became the first developed market central bank to cut rates in this cycle. This doesn’t necessarily mean that other Western central banks will be able to quickly follow suit: Swiss headline inflation has already fallen back to almost 1% (the SNB’s target) while inflation has proved “stickier” in the US.

At its latest meeting, the Fed left rates unchanged and, contrary to what the market thought at the start of the year, they are now expected to remain on hold for the next couple of meetings. Expectations for US rate cuts in 2024 have been scaled back to just three cuts, from seven at the start of the year. The first interest rate cut is expected in June.

In the UK, the Bank of England also left rates unchanged, although the two members of the Monetary Policy Committee who had been in favour of rate hikes took a more dovish stance. The BoE and ECB may also start cutting rates in June, absent a significant growth or inflation shock.

Bond markets

Bond yields have adjusted to these higher interest rate expectations, which has weighed on bond performance, with US, UK, and Euro government bonds down 0.7%7 or more for the quarter. Corporate credit benefited from a continued tightening in credit spreads, with high yield being the standout performer thanks to its lower sensitivity to rising yields. Asset backed securities also outperformed government bonds, although valuations remain reasonable and our positive outlook is intact.


Commodities (our highest conviction theme within alternatives) performed positively but this masked significant divergences in the underlying assets. Brent crude and gold rose 13.6%8 and 8.2%9 respectively, whilst natural gas and grains were down 28%10 and approximately 10%11, leaving broad commodities up 2.2%12. Our choice to actively play this space worked well as the L&G enhanced commodities fund returned 3.9%13 in the same period. Alternatives face tough competition as a source of diversification today, given yields available on cash and bonds, but we still see the appeal in commodities. We particularly like gold as it should provide diversification in an inflation shock, whilst also benefiting from both central bank purchases and weakness in China’s property market (as consumer look to invest their savings elsewhere). Recent performance has been strong, however, making us mindful of increasing allocations any further.


Looking ahead, we remain relatively positive. Although interest rates are weighing on growth, a soft-landing looks likely​ thanks to resilient consumer demand in developed markets. Headline measures of inflation should continue to moderate, although core inflation is likely to remain above target which may give central banks pause for thought. Even the three rate cuts currently expected may prove to be overly optimistic in the US, but equity markets have so far taken the “higher for longer” narrative in their stride given the continued strength of the economy.

This backdrop should be supportive for equities, but we remain conscious of expensive valuations (relative to bonds and cash) and overly positive investor sentiment. This keeps us neutral on equities overall, although we did make changes within our equity exposure over the quarter. We reduced the allocation to global equity funds in favour of regional ones, providing us with greater flexibility to allocate between regions. As the global economy becomes less synchronised in terms of both growth and interest rate cycles, we think this flexibility will be important. The changes leave us with slightly more exposure to the US and slightly less to the UK and Europe, but our overall exposure to equities remains unchanged.

We continue to like fixed income, given yields are at attractive levels relative to the last decade. We marginally prefer short duration bonds, which are typically less sensitive to inflation shocks, as well as inflation-linked bonds – both of which should hold up better if inflation surprises to the upside. Given the elevated yields available on cash and bonds, alternatives face tougher competition, and we remain underweight with a preference for commodities.


2 USD price return


4 MSCI Europe ex UK, TR in GBP

5 MSCI Japan TR in JPY

6 LSEG DataStream MSCI Japan, 12 month forward price to earnings

ICE BofA indexes, LSEG DataStream

 8 ICE Brent Crude USD

9 Gold in USD

10 Natural gas in USD

11 Mixture of wheat and corn in USD

12 Bloomberg Commodities Index GBP

13 L&G Enhanced Commodities in GBP

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.


Josh Barber
Investment Manager

The value of your investments and the income received from them can fall as well as rise. You may not get back the amount you invested.