Quarterly Investment Update

US equities recorded another quarter of strong performance, with S&P 500 delivering 10.2% gains to investors. The equity rally that started in the fourth quarter of last year carried on in 2024, and the S&P 500 entered new record high territories. Gains were once again boosted by optimism surrounding AI stocks after Nvidia quarterly results revealed a 265% YoY rise in revenue and forecasted another stellar revenue gain for Q1. Optimism surrounding AI outweighed some concerns surrounding the level of interest rates and inflation. Solid economic readings and higher commodities prices reinforced the view that interest rates will remain higher for longer. Investors have now adjusted their interest rate cut expectations to reflect less cuts in 2024, and are now more aligned with the Federal Reserves’ guidance, as opposed to the beginning of the year when markets expected the Fed to start cutting rates in March. So far this year the Fed has kept rates unchanged, but has communicated that they expect to deliver three rate cuts in 2024. This marked a change in the Fed’s rhetoric which coincided with a surprise cut by the Swiss central bank – the first developed nation’s central bank to cut rates - which stroked a dovish tone with investors and provided a further boost to equity prices. At the same time, economic data continue to paint a good picture for the US economy which grew by 3.1% in 2023. This, in combination with investors’ adjusted interest rate expectations, helped the USD advance by approximately 3% vs a basket of its peers.

European equities gained 12.4% in Q1. Investors expectation for ECB interest rate cuts have also been pushed out to later this year, largely because of similar adjustments to US rate cut expectations, but also because of tightness of the euro-area labour market. Higher labour costs pose a risk to inflation which has so far this year fallen by more than expected reaching 2.4% in February. These upside risks to inflation could result to fewer rate cuts from ECB. This could prove a problem for the euro-area economy which is facing weaker-than-expected growth prospects over the next years as high interest rates weigh on economic activity. In addition, delays in the implementation of EU’s Next Generation recovery plan seems to be holding back public spending from the eurozone economy. This, in addition to the stagnating productivity has caused the S&P rating agency to revise the area’s expected growth downwards. In light of these risks the EUR depreciated by 2.3% vs the USD.

Swedish equity prices have increased by 5.1% in Q1. Equities took support after Riksbank laid the groundwork for monetary policy easing as soon as May and predicted three rate cuts by the end of the year. Such move would offer some relief in Sweden’s economy that has shrunk for three consecutive quarters due to higher borrowing costs. The announcement follows data showing that inflation dropped by more than expected in February to 3.5%. However, lower interest rates put downwards pressure on the Swedish krona which has depreciated by 3.3% and 5.8% vs the EUR and USD respectively in 2024. With Riksbank also having completed it’s FX operations which had boosted its currency in the second half of 2023, the krona is left without any upside support. On a positive sign, Sweden’s home construction sector is showing tentative signs of recovery after shrinking following the surge in interest rates over the past two years.

Chinese equities were up in Q1. Stocks managed to reverse initial losses after authorities delivered their biggest-ever cut to a key mortgage reference rate, offering a much-needed support for the country’s struggling property sector and raising expectations for more economic support measures to come. China’s consumer inflation turned positive for the first time in six months and increased by 0.7% in February, largely supported by spending boom during the Lunar New Year holiday. This is considered a positive sign for the economy which has been facing deflationary pressures. However, concerns surrounding the country’s real estate sector re-emerged after a court in Hong Kong ordered the liquidation of Chinese property giant Evergrande and after Country Garden Holdings Co. missed a coupon payment on a yuan bond for the first time.

Japan equities also had a very strong start of the year with TOPIX delivering gains of 17%. In March, Bank of Japan ended its negative interest rate policy, shifting its rate target to 0-0.1%, after years of trying to fight off deflation. The decision came after Japan’s 2024 Shunto results (i.e. wage negotiations) saw the largest agreed wage increases in 33 years, which could boost demand and further support inflationary pressures. Japan’s headline inflation rate for February came in at 2.8%. Despite the rate hike, the yen depreciated against the USD by 7.3% in 2024, as the BoJ said that a rapid pace of hikes is unlikely considering the fragile economic outlook for the economy, disappointing investors that bet on more aggressive monetary tightening.

On the commodity side, ongoing geopolitical tensions and lower oil supply concerns have driven crude oil prices up this year by 16%. At the same time, better than expected manufacturing data out of both China and US, further increases the demand side pressure on oil prices. Similarly, gold prices surged by 8% in Q1 and have reached new record highs supported by geopolitical risks but also by the upcoming Fed interest rate cuts expected later in the year.