Global equities continued their positive momentum from last year as evidenced by the MSCI All Country World Index, a broad measure of global equity markets, which gained 8.2% for the first quarter of 2024
Global equities continued their positive momentum from last year as evidenced by the MSCI All Country World Index, a broad measure of global equity markets, which gained 8.2% for the first quarter of 2024. Gains, for the most part, could be attributed to the same factors that drove equity markets higher last year, namely artificial intelligence (“AI”) and the prospect of interest rate cuts.
While these remain the key drivers behind equity markets, they do continue to evolve. Despite inflation levels maintaining their downward trajectory, many central banks, in particular the US Federal Reserve (“Fed”), have resisted the urge to pull the trigger and commence cutting interest rates. This may have something to do with US inflation edging slightly higher during February to 3.2%, up from 3.1% in the previous month. The outlook for the number of rate cuts by the Fed during the year has also reduced from six to three as the yield on the US 10 Year increased 38 basis points during the quarter to close at 4.20%.
An additional nuance is the makeup of the companies driving markets higher. Gains derived during 2023 were somewhat narrow with a small group of companies, namely the Magnificent 7 (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla) accounting for an outsized portion thereof. In contrast, the performance of some of the “gang” during this quarter has left many wondering whether the moniker still applies and perhaps some may even start referring to them as the Good: Nvidia (+83%), Meta (+37%), Amazon (+19%) and Microsoft (+12%), the (not so) Bad: Alphabet (+8%), and the Ugly: Apple (-11%) and Tesla (-29%).
As opposed to a handful of stocks driving the market higher, gains have begun to broaden out and we saw strong performances by cyclical stocks within the Energy, Financial and Industrial sectors. The Fed may have dampened the macro picture after reducing its projections for interest rate cuts but it did upgrade its forecast around economic growth for the year. The combination of the two macro variables may be underpinning the positive performance seen within cyclicals.
Energy stocks have also been boosted by an increase in the price of oil during the quarter with Brent crude and WTI closing the quarter at $87 (+12%) and $83 (+16%) a barrel respectively. Tensions in the Middle East aside, other factors contributing to rising oil prices include an improved outlook for economic growth as well as Opec+ members, which include Saudi Arabia and Russia, extending voluntary production cuts in an attempt to lift prices higher.
As mentioned, the AI theme continues to influence market sentiment and it remains the primary reason behind the Information Technology and Communication Services sectors ending the period as the top performers. In particular, semiconductor and related hardware stocks, which fall under the Information Technology sector, remain the primary beneficiaries of the AI gold rush taking place. Nvidia, the poster child for the AI evolution, saw its market cap soar past the $2 trillion mark during the quarter, making it the third most valuable company in the world. AI heavyweights, Alphabet and Meta, were the primary contributors to the gain by the Communication Services sector.
Regionally, the top performing major market during the quarter was Japan. In fact, Japanese equities have been relative outperformers for over a year and there are a host of factors driving their upward moves. These include initiatives by the Tokyo Stock Exchange to compel companies to invest in their businesses and improve shareholder returns, tax incentives that will encourage households to reallocate savings into equities and possibly the decline in investment appetite for China.
Chinese equities continue to underperform as a slowdown in growth and concerns over an indebted property sector linger. Elevated debt levels, be it Chinese real estate or even US government debt, have led many investors, as well as central banks, to continue to allocate funds to gold. The price of the yellow metal reached new highs during the quarter as it closed the period at $2,214/ozt. Adding to its allure are the anticipated rate cuts by the Fed as well as other central banks. Bullion does not provide a yield and as rates come down, so gold glows ever brighter.
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