Market commentary - March 2024

If you were left disappointed at the cost or size of Easter eggs this year then you can blame, at least in part, the price of cocoa. A supply crunch has resulted in a surge in commodity markets, with the price of cocoa bean contracts more than doubling in three months to a peak twice the previous record high.

Although not as dramatic, other commodities also moved up during the month. The gold price soared to fresh highs as greater geopolitical uncertainty and signals of forthcoming rate cuts from the US Federal Reserve (Fed) increased the commodity’s attractiveness as a store of value. The ongoing conflicts in Ukraine and Gaza combined with the potential for Donald Trump to return to the White House, bringing a less telegraphed approach to foreign policy, adds to the appeal for some.

Elsewhere, investors have been sceptical about the Chinese economy and its consumption of base metals and other raw materials. Yet tighter supply in certain areas such as copper has reinvigorated interest recently, and mining stocks reclaimed some ground over the month following a weak spell. The oil price crept up too hitting a four-month high of around $84 a barrel, which boosted energy shares. The International Energy Agency (IEA) now forecasts global oil markets will face a supply deficit throughout 2024, instead of the surplus it previously estimated.

Stock market performance broadens

Wider share markets finished the first quarter of the year on a positive note with the US market enjoying its best start to the year for five years and reaching an all-time high. Besides economic data generally surprising on the upside, the main catalyst was a gathering consensus around the scale of interest rate cuts this year, as well as central banks talking more explicitly about lowering rates. The US Federal Reserve (Fed) foresees three 0.25% cuts over the remainder of 2024, and investor expectations have shifted in line with this view having previously been more hopeful of earlier and faster cuts.

The dominant big tech company shares did well, but it was a well-balanced move higher with many sectors performing well. Symbolic of this, and somewhat under the radar, global energy stocks outperformed the tech-laden US Nasdaq in first quarter. Geographically too, it was not just about the US. There were decent showings from Japan and Europe as market leadership broadened out.

UK joined in too with some tentative good news on the economic front. The UK returned to growth month-on-month in January, boosting hopes the country is now out of the technical recession seen in the final six months of 2023. Combined with the greater clarity surrounding interest rates, medium sized and small companies were lifted from a period of torpor. Meanwhile, larger, more internationally orientated stocks benefited from fresh strength in the US dollar boosting earnings potential and, for the oil and gas majors and mining constituents, a rebound in commodity prices.

Going forwards, the backdrop appears benign for asset prices overall. Inflation falling back to the widely accepted 2% target in most major economies without triggering recession is a rosy scenario. Meanwhile, corporate earnings for 2024 look robust, with 10% plus growth pencilled in, which in turn should help fuel both dividends and share buybacks. Complacency, however, is not warranted. Interest rates remain in restrictive territory and are now high in relation to inflation. Weaker areas and more vulnerable companies could struggle, especially where there is excessive debt, and notably many real estate markets have been damaged and remain fragile.

Bonds steady as interest rate consensus grows

Bond markets were modestly ahead over the month as the markets interpreted the result of the Fed’s latest meeting as dovish (i.e., leaning towards interest rate cuts), despite an uptick in inflation and the central bank keeping interest rates unchanged.

Some in the market were worried that higher inflation readings since the turn of the year would force the central bank to take at least one of the anticipated interest-rate cuts off the table, but after a period of overoptimism about the pace of interest rate cuts, market expectations and guidance from Fed officials has now converged.

In the UK, Bank of England governor Andrew Bailey has said interest rate cuts could come before inflation hit its 2% target after the bank left them unchanged at 5.25%. This followed data that showed inflation fell to its lowest level in almost two and a half years in February, as price rises for food slowed sharply. Last month’s fall in the annual rate to 3.4% from 4% in January means the cost of living is rising at its slowest pace since September 2021.

While markets have applauded the steady view from central banks, with global growth robust there is still scope for some disappointment on earlier rate cuts, especially in the US where the economy remains remarkably strong.

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 March 2024:

Top ten performing funds

The gold price soared to fresh highs amid greater geopolitical uncertainty, while mining stocks reclaimed some ground over the month following a weak spell. The oil price crept up too hitting a four-month high, which boosted energy shares. These trends combined to propel gold and wider commodities funds to the top of the performance tables in March.

Bottom ten performing funds

Among the few weaker areas during the month Chinese and Indian stock markets were laggards. The former has languished for some time as China’s economy has struggled to shake off difficulties in the real estate sector, while geopolitical tensions and growing state intervention in the economy have weighed on foreign investor sentiment. India, meanwhile, has been a strong performer of late but returns took a breather this month.

Top ten performing sectors

For most of 2023, an unusually small number of stocks drove the gains of the US and world markets. Yet the ‘Magnificent Seven’ are no longer moving in unison and more companies are participating in this year’s rising markets with March’s sector returns showing widespread strength across multiple areas and geographies.

Bottom ten performing sectors

In contrast to shares, bond markets managed only modest gains over the month. After a period of overoptimism about the pace of interest rate cuts, market expectations and guidance from central banks has reached greater consensus. However, with the pace of global growth robust the scope for rate cuts could still be a little more limited, especially in the US where the economy is notably resilient.

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 March 2024: 29/02/2024 to 31/03/2024. 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.