Monthly update: Strong economic outlook keeps markets moving forward

WHAT’S HAPPENING IN FINANCIAL MARKETS?

A resilient global economy, solid earnings season and hopes of interest rate cuts later this year helped boost global equities in February. Stock markets performed strongly despite higher-than-expected US inflation.

US economic strength has been a key driver of global growth. The world’s largest economy grew faster than expected last year, with unemployment still at near record lows and inflation continuing to fall, albeit now more gradually, towards its central bank’s 2% target.

We believe inflation will continue to ease. But the slower-than-expected pace at which it’s been falling has prompted markets to re-evaluate their interest rate cut expectations. In line with the US Federal Reserve’s (Fed) most recent forecast, they are now pricing in three interest rate cuts for 2024, rather than the six cuts they were expecting previously.

The UK and Japan both slipped into recession at the end of last year. The Nikkei 225 index – Japan’s largest 225 companies – reached a 35-year high. Stocks have been driven by a profitable corporate sector, helped by a weaker yen supporting export activity.

UK stocks have experienced lacklustre performance, which may seem contrary due to the market’s international profile. The FTSE 100 performs better in rising interest rate environments, as seen in 2022, and the backdrop for interest rates has since shifted.

Nevertheless, the UK recession is mild and is expected to be short lived as there are signs of green shoots in recent economic data. Additional support came from Bank of England (BoE) governor Andrew Bailey, who said inflation won’t need to reach the 2% target before interest rates are cut. However, we are unlikely to see any meaningful policy shifts from the BoE until the summer.

Monique Wong, Head of Multi Asset Portfolio Management, Coutts, says: “Stock markets are still doing well across the board despite sticky inflation pulling back interest rate cut expectations.”

WHAT DOES THIS MEAN FOR YOUR INVESTMENTS?

We currently hold more global equities than our benchmark, and were therefore well positioned to benefit from February’s strong market performance. Nevertheless, we are aware that risks remain, particularly in terms of geopolitical developments, and review our portfolio positioning regularly.

We’ve made three key changes in recent months which served our client portfolios and funds well.

• We’ve been progressively bolstering our investments to favour stocks over government bonds, as economic signals have improved since October.
• We added high-yield bonds to portfolios, which tend to perform well when the economy is expanding. Against this backdrop, we are taking advantage of attractive yields from this asset class.
• We strengthened portfolio diversification by adding gold, which is currently performing better than government bonds and could help insulate our investments from geopolitical headwinds and other unexpected risks.

The value of investments, and the income from them, can fall as well as rise and you may not get back what you put in. Past performance should not be seen as an indication of future performance. You should continue to hold cash for your short-term needs.