Market commentary - April 2024

Global share markets mostly fell in April, but amid an evolving inflation picture there were notable areas of strength too.

| 11 min read

Following a blockbuster first quarter of 2024, global share markets pulled back in April. The greatest pain was felt among some of the previously high-flying tech stocks, where certain companies failed to meet the high bars investors had set for them.

Meta, for instance, released positive results, but investors were less than enamoured with its spending plans in artificial intelligence and related infrastructure. Yet it was a mixed bag for the sector with Google-owner, Alphabet, posted a market-pleasing set of first-quarter results, as it also announced its first dividend payment and a $70bn share buyback. Microsoft provided a positive update too. Overall, it meant the US S&P 500 gave back half its year-to-date gains at one point, but then rallied into the month end.

Other areas of the globe showed more resilience. Chinese shares continued to bounce off the lows seen earlier this year as signs of shifts in government policy and ongoing economic restructuring ignited hopes of improved corporate growth and shareholder returns. It appears the Chinese regulator is taking a more positive stance on dividends and corporate governance, aiming to boost investor sentiment and increase the attractiveness of the market to foreign investors.

China’s economy grew at a 5.3% annualised rate in the first quarter of the year – higher than expected, but consumer sentiment remains at a low ebb amid an ongoing slump in the real estate sector. As much as 60% of Chinese household wealth is in property, while weak stock markets over the last couple of years has exacerbated the negative wealth effect. Further support measures from the government will likely be required before the economy can truly fire on all cylinders.

Can the FTSE rise further?

In April, the UK market was buoyed by energy and mining heavyweights, as well as pharmaceuticals giant AstraZeneca, as the FTSE 100 index posted a series of new all-time highs. The index has laboured for several years, underperforming its global peers and failing to decisively break free of the 8,000 level. Yet a weakening pound and a recovering economy has attracted buyers, plus a flurry of bids for British businesses has cast fresh light on the value on offer.

The number of takeovers of UK public companies reached a decade high in 2023, and already this year there have been a significant number of approaches. Most of the activity has been concentrated in small and medium-sized companies, but now a potential mega-deal has surfaced in the mining sector with BHP Group proposing a takeover of fellow FTSE 100 constituent Anglo American.

Whether this provides a decisive catalyst to propel the UK market higher remains to be seen, but the mining sector could continue to be an area of focus. It’s increasingly difficult to find new deposits of metals and open new mines, so acquisitions can represent a short cut to adding productive assets. With the copper price surging in recent weeks, Anglo American’s considerable reserves make an appealing prospect for a larger mining group like BHP, particularly as the metal is essential for the continued transition to greener forms of electricity production.

Even if the FTSE’s renaissance proves short lived, the UK market does have some redeeming features, which are sometimes overlooked, not least a healthy dividend yield that’s well diversified from the UK economy itself with three quarters of earnings from overseas. There are several ways of investing in the FTSE 100, as well as UK stocks more broadly. As well as selecting individual shares yourself, which is riskier, you can consider funds which offer exposure to a wide basket of stocks. These take either a ‘passive’ approach of aiming to replicate the performance of an index, for instance the FTSE 100 or FTSE Allshare, or an ‘active’ strategy of trying to beat it. Our Preferred List offers some ideas for new investment for both types.

Will interest rates be cut this year?

While recent corporate results have been a mixed bag, the news on inflation was decisively bad. Price rises in the US continued to surprise on the upside, the result being that investors now expect later and fewer interest rate cuts. Overall, this is a negative influence weighing on share markets as investors increasingly worry central banks are boxed into a corner of stubborn inflation and slowing growth.

Markets now point to fewer than two rate cuts in 2024, having priced in as many as six or seven back in January, meaning interest rate sensitive areas such as property, infrastructure and utilities have struggled. So too bonds where yields have crept up across the board, an effect that is feeding through into the mortgage market. With markets indicating only a couple of 0.25% cuts over the remainder of the year, it seems homeowners can’t look forward to any meaningful fall in mortgage costs just yet.

We believe the European Central Bank will likely be the first of the major central banks to modestly reduce rates this year – probably closely followed the Bank of England. Any US reductions looked poised to follow on later with market pricing indicating just one 0.25% cut by November given the apparent resilience of the American economy and the stickier inflation picture.

The US Federal Reserve (Fed) will be acutely aware that reducing rates too much and too soon might risk inflation getting stuck at an uncomfortably high level — or even reaccelerating – which would severely damage its credibility. The timing of the US election later this year is also set to have an influence. The Fed will want to hold interest rates during the campaign period to remain politically neutral, which likely means September is the final opportunity for a rate cut until the election is over in November.

Read more: When will interest rates go down?

Why is the gold price rising?

It was a positive month for commodities, further adding to the cloudy inflation picture. Many metals, including gold were strong, while wheat prices were ominously on the rise following a lack of rain in the US breadbasket, Kansas. Meanwhile, against a backdrop of robust global demand and OPEC output cuts, heightened geopolitical tensions applied further upward pressure to oil prices with Brent crude breaking above $90 per barrel for the first time since October.

With inflation remaining higher than the Fed's 2% target, some investors are increasingly worried that it might simply accept a higher inflation environment, or that it can’t do enough about it. This is starting to fuel higher metal prices, especially gold and silver, which rallied strongly in March and continued making new highs in April.

Recent price action is unusual in the sense that when real (or inflation adjusted) interest rates remain high – as they currently are – precious metals that pay no interest tend to be seen as less appealing. Accordingly, it’s unsurprising to see the heavy selling of gold ETFs in the US and Europe. So, why such a buoyant bullion price? The explanation seems to lie in heavy central bank buying across emerging markets, notably from China, as it looks to diversify its currency reserves. Some commentators are calling for more highs for gold as this trend continues, but if US economic data remains strong and the Federal Reserve further delays cutting interests then it’s more doubtful gold will be able to sustain its gains.

Read more: Should you invest in gold?

What is happening to the Japanese yen?

The divergence in the economic situation between the US and most other nations is causing the US dollar to strengthen, which is causing inflation headaches in other nations, especially those that rely on imported energy and goods. Japan is a prime example. Interest rates remain close to zero, completely at odds with the global norm, which has sent the yen plunging to multi-decade lows.

The currency weakness is a advantage for some Japanese exporters which can control costs while gaining competitiveness on the global stage. However, it’s less welcome for the nation’s households and the domestic economy that serves them, something reflected in a sharp decline in funds that target Japanese smaller companies or, more broadly, own significant yen-denominated assets.

The Bank of Japan is expected to maintain its accommodative interest rate stance going forward, and it’s unclear what it might do to get out of its current bind. Tightening too early in the face of high inflation would return the economy to stagnation. On the other hand, staying loose and keeping interest rates at rock bottom for a long time could allow inflation to entrench at too high a level.

Although investors should be aware past performance is not a reliable indicator of future results, here are the top and bottom ten Investment Association (IA) funds and sectors* for April 2024:

Top ten funds

It was a strong month for commodities funds with a resurgent gold price, broader strength in metals and a potentially symbolic bid approach in the UK’s mining sector.

Bottom ten funds

Yen weakness is unwelcome for Japan’s households and the domestic economy that serves them, something reflected in a sharp decline in funds that target Japanese smaller companies.

Top ten sectors

Chinese and Indian specialist funds provided strong returns, while the UK also bucked a broader trend of falling stock markets over the month.

Bottom ten sectors

Interest rate sensitive areas suffered as investors fretted that rate cuts will be later and fewer. As well as negative returns for bonds and gilts, higher growth areas of share markets such as tech and healthcare fell back.

The value of investments can fall as well as rise. Investors may get back less than invested. Past performance is not a reliable indicator of future returns. Figures are shown on a % total return basis, bid to bid price with net income reinvested; Source: FE Analytics, data for April 2024: 31/03/2024 to 30/04/2024. Onshore and retail open-ended funds only.

*There are several thousand funds on sale in the UK. The Investment Association divides these into about 45 sectors, broad groupings that help investors and advisers compare funds of similar types before looking in detail at individual funds.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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