Global equities generated positive returns over the twelve months to 31 March 2024. Inflation began to moderate in most major economies as the global economy proved more resilient than previously anticipated. The rally in Information Technology stocks was a major contributor to equity market gains over the past year, as investor excitement over artificial intelligence grew.
Geopolitical tensions remained elevated over the period:
- On 7 October 2023, Hamas launched a surprise attack from Gaza on Israel and Israeli Prime Minister Benjamin Netanyahu consequently declared the nation “at war” and mounted military retaliation in Gaza.
- In Q1 2024, the US and UK launched military strikes against Houthi rebels in Yemen, increasing fears that conflict in the Middle East will spread.
- The US and UK accused China of carrying out cyberattacks on their officials and businesses that are of national economic importance.
- The European Union (EU) introduced a new set of sanctions against Russia, targeting nearly 200 individuals and entities, whilst the US also announced 500 new sanctions against Russia.
- China banned US-based chipmaker Micron Technology’s products, in China’s biggest measure against a US semiconductor group. In response, US President Joe Biden signed an executive order banning investment in some of China’s critical tech industries which includes quantum computing, advanced chips, and artificial intelligence sectors.
- Finland officially became the North Atlantic Treaty Organization’s (NATO) 31st member after Turkey joined other NATO countries in supporting Finland’s membership.
- In Q3 2023, G7 countries announced a plan to provide a long-term security framework to Ukraine by continuing existing financial assistance, supplying military equipment, providing training to Ukrainian forces, and sharing intelligence.
In Q3 2023, Fitch downgraded the US debt rating from AAA to AA+, citing “erosion of governance” over the past two decades which saw the US government in repeated debt limit stand-offs and last-minute resolutions. US President Joe Biden signed a $1.2 trillion spending bill to avert a partial government shutdown, which will keep the US government funded until September 2024. Meanwhile, Moody’s downgraded their US credit outlook from ‘stable’ to ‘negative’ amidst the lack of a permanent funding agreement and sharp rises in debt service costs.
Sterling ended the period 4.8% higher on a trade-weighted basis. Over the last year, the Bank of England (BoE) raised its benchmark interest rate cumulatively by 1.00% to 5.25%. The Monetary Policy Committee (MPC) indicated that monetary policy will need to remain restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term. The BoE agreed to increase its current quantitative tightening pace of £80bn to £100bn in 2023-24.
The US Federal Reserve (Fed) increased its benchmark interest rate by 1.25% to a range of 5.25%-5.5%, representing the highest level in more than 22 years. The European Central Bank (ECB) raised its deposit rates by 1.0% to 4.0%, touching an all-time high. The Fed, the BoE, and the ECB all decided to pause their monetary policy hiking in the final months of 2023 and Q1 2024, as inflation continued to fall. Elsewhere, the Bank of Japan (BoJ) ended its era of negative interest rates by raising its interest rate to 0-0.1% from the previous -0.1%.
Brent crude oil prices rose by 9.7% to $87 per barrel over the twelve months. Meanwhile, the Organization of the Petroleum Exporting Countries Plus (OPEC+) members announced voluntary oil production cuts until Q1 2024. Saudi Arabia pledged to extend an ongoing 1m barrels per day (bpd) production cut whilst Russia will amplify its export reduction from the current 300,000 bpd to 500,000 bpd.
The graphs below summarise the index returns on the main asset classes/regions for the year to 31 March 2024. Returns are shown in sterling terms and local currency terms.
Equities
UK equities delivered positive returns over the year. The Financial sector performed strongly, as did other heavyweight sectors such as Industrials and Energy, while there was an underperformance in Consumer Staples. Comparatively less exposure to the Technology sector compared to other developed markets, weighed on UK equities.
US equities performed strongly over the year. Following Silicone Valley Bank’s (SVB) collapse in March 2023, investors shrugged off short-lived concerns over the banking sector and priced in a quicker end to the sharpest tightening cycle in recent history. Expectations for new revenue streams, driven by artificial intelligence, boosted optimism for the largest US technology stocks. Index-heavyweight sectors such as Information Technology and Financials performed strongly while Communication Services was the best performing sector.
European equities posted double digit returns over the period. European equities recorded positive returns over Q2 2023 despite the Eurozone economy entering a technical recession. However, these gains were wiped out in Q3, partly due to political uncertainty in Spain. A stabilisation of the political situation in Spain supported a European equity rally in Q4 2023, and the region also posted positive returns in Q1 2024.
Japanese equities were the best performing market in local currency terms and second best performing in sterling terms throughout the year, as the Bank of Japan continued to maintain its loose monetary policy in contrast to most central banks. The sharp depreciation of the Yen during Q2 and Q3 2023 helped exporters, as it declined to almost a year low against the US dollar.
Emerging markets were the worst performing market both in local and sterling terms. Increases in interest rates by major developed central banks during the first half of the year, and a strong dollar, caused a headwind. Slower-than-expected economic recovery, and renewed US-China tensions put pressure on Chinese equities. Indian equities rose the most with strong performances by Taiwanese, Brazilian, and Korean equities, while Chinese equities fell.
UK Fixed Income
UK fixed-interest gilts returns were flat, while index linked gilts returned -5.0% over the year. UK gilt yields rose across all maturities over the year, although there was variation during the year. In Q2 2023, gilt yields rose across all maturities, but yields rose more for shorter than longer maturities. This was reversed in Q3 2023, when yields fell at short to medium maturities, but rose for longer maturities. In Q4 2023, yields fell sharply across maturities, and again this was reversed in Q1 2024.
The UK credit market performed positively over the twelve months, returning 6.1% (as measured by the iBoxx Sterling Non-Gilt Index). UK investment-grade credit spreads (the difference between corporate and government bond yields) narrowed significantly over the year. The BoE warned that British companies face a higher risk of corporate default as a result of rising interest rates.
Global Fixed Income
Global bond yields fell over the year, with the JP Morgan Global Aggregate Bond Index rising 1.1% in local terms, although it posted a negative return of 1.0% in sterling terms. In Q2 2023, global bond yields increased as major central banks indicated further interest rate rises to bring inflation down to target. This included the US, where the Federal Reserve (Fed) increased its benchmark interest rate by 0.25% to a range of 5.0%-5.25%, the highest level since 2007, after pausing monetary policy tightening in June. The increase in yields continued in Q3 2023 as major central banks continued to move forward with tighter monetary policy but at a slower pace. In Q4 2023, yields fell sharply as major central banks around the world kept their interest rates unchanged and market participants expected a greater chance of interest rate cuts in 2024. In Q1 2024, bond yields moved higher following falling market expectations for central bank rate cuts this year.
Property
UK commercial property returned 0.3% over the year as capital values depreciated, following sharply higher capitalisation rates over the year. The industrial and retail sectors rose by 5.9% and 1.1% respectively while the office sector fell by 11.5%.
In global property, high interest rates and tighter credit conditions led to partially frozen capital markets and further decreasing transaction volumes at the start of the period in Q2 2023. Investor sentiment was dampened in Q3 2023 by geopolitical events and expectation that interest rates would remain higher for longer. This led to further declines in transaction volumes and subdued leasing activity. Office vacancy in the US hit a 30-year high, although there was rental growth in the office sector in Europe and Asia Pacific. This trend continued in Q4 2023, with the office sector continuing to face leasing challenges, although a ‘flight to quality’ pushed up rental growth in high quality offices in Europe. Rent growth in the residential sector in Europe and Australia beat expectations as demand remained strong, whereas the US experienced continued apartment rent declines resulting from new supply coming to market.
Infrastructure
Infrastructure funds generally performed in line with their objectives over the year, although diversification across sub-sectors continued to be important to returns. Continued pick up in the energy transition and the introduction of the Inflation Reduction Act in the US and a similar policy framework in Europe further supported renewable energy development and other projects and assets critical for the energy transition (e.g. battery storage, carbon capture and storage, etc.). These policy frameworks supported returns and valuations for existing assets in these sectors.
While lower than prior years, inflationary pressures over the course of 2023 remained generally neutral to positive for infrastructure assets with a moderate to high degree of inflation passthrough (raised prices as a result of higher inflation). This included those with explicit indexation as well as those with implicit pricing power. There was some regulatory pressures on utilities in Europe, particularly in Finland, although the debt market for infrastructure assets has generally remained strong.
The graphs below summarise the index returns on the main asset classes/regions for the year to 31 March 2024. Returns are shown in sterling terms and local currency terms.
*Global Property returns for 31/12/2022 – 31/12/2023 as annual returns to 31/03/2024 not yet available.
Source: FactSet, MSCI (Equities, Property), FTSE (Gilts), iBoxx (Credit), JP Morgan (Aggregate Global Bonds).