Global stock markets continued their strong period which began towards the end of 2023 and ended the first quarter of 2024 with a spring in their step. Despite ongoing geopolitical concerns, investor sentiment is much improved from that 12 months prior. It was a weaker quarter for bond investors, with the speed and timing of interest rate cuts being pushed back with economic figures remaining largely resolute. However, against a backdrop of UK inflation continuing to fall sharply to the lowest level in almost two and a half years, it is a case of when, rather than if, the first cut will occur.

During the quarter it was announced that the UK had technically entered recession following two negative quarters in the second half of 2023. Importantly though, this recession is very mild and likely one of the weakest on record. There are also signs that the UK may have already exited recession following comments from the Bank of England Governor, Andrew Bailey, on the back of stronger, more recent economic data. As well as this it was interesting to note the Governor mentioning that inflation doesn’t need to fall back to the central bank 2% target before interest rate cuts come.

The good news for the central bank chief is that inflation is indeed falling back, with the 3.4% reading announced in March the lowest level for two and a half years. To put that in context, the consumer price index (CPI) was 10.4% exactly a year ago. Other central banks grabbed the headlines during the quarter with the Swiss National Bank cutting its main interest rate by 0.25%. In the Far East, the Japanese central bank decided to finally exit their negative interest rate policy and with their first interest rate hike in 17 years they announced short term interest rates would be raised from -0.1% to between zero and 0.1%.

The FTSE All Share delivered a total return of 3.5% during the quarter, with the S&P 500 returning 11.6% and Nikkei 225 rising by 14.3%. Such strong returns have pushed US and Japanese stock markets to record all-time highs, principally driven by the fact that equity markets globally offer good value and the stronger economic data coming out of the US.

It was a weaker quarter for bond markets on the back of hotter than expected US inflation data in both January and February. Expectations for interest rate cuts had gone too far as we entered 2024 in terms of the amount and timing of interest rate reduction. The current level of three interest rates cuts in 2024 towards the end of the year seems far more sensible. In summary, the UK was in recession at the end of 2023 but has likely already exited. Inflation continues to fall sharply, and interest rates are likely to be cut a number of times in 2024. Outside the UK, economic and inflation data is still elevated in the US which has pushed back expectations for interest rate cuts. Against this backdrop, stock markets are close to, or hitting, fresh highs, reversing the painful impact of 2022. However, this has been a slight headwind for bond investors which would seem a temporary setback. Despite the improvement over the last five months we continue to see attractive investment return for clients over the long term based on current valuations.