MPS Update: May 2024

Despite the extension of higher-for-longer interest rates, strong economic growth and a healthy labour market buoyed US equities through Q1. Strong earnings for Nvidia and many large tech companies helped Growth investors while GDP growth supported the broader market. Four of our five top-performing funds in Q1 across MPS were US equities. Japanese equities also continued their rally. A strong wage season, “Shunto”, further embedded inflation into the economy, which is viewed as a positive in Japan after their years of fighting deflation. Indeed, this allowed them to unwind the negative interest rate policy and move towards a more normalised monetary regime.

As was expected once the higher-for-longer story gained conviction, Fixed Income had a mediocre quarter. As economic growth picks up across Europe, and the US data continues to show expansion, Government bond yields will remain elevated. Through April, we saw these yields rise by up to 40bps, depending on maturity. Our direction of travel is still to increase equity risk within portfolios opportunistically. Yields rising in reaction to economic growth is a good sign, and not a symptom of inflation expectations. The UK remains our favoured equity region. The valuations are severely depressed but earnings momentum and economic recovery, alongside likely rate cuts later this year, offer catalysts for price movements. We have seen this begin to play out through April, with our Value exposure performing particularly well. We also maintain our conviction in Alternative Income. Similarly to the UK, they have been trading materially below their intrinsic value. From this starting point, we expect equity-like returns over the medium-term.

Risks still remain. We are less than halfway through a busy year for elections, the most important of which for financial markets are yet to come. Similarly, we are only in the middle of the journey to bringing inflation back to target. The US has shown how unpredictable monthly data can be and how quick markets are to react to any slight overshoots or undershoots. These factors are regular talking points in our Investment Committees, MPS discussions and around the desk. However, we believe our models have attractive return potential from this starting point and remain prepared to increase exposure to equity markets as opportunities arise.