In the first quarter of 2024, global equities continued to perform well, as discussed at the beginning of the year. The normalization of economic distortions from the pandemic contributed to this strong performance. Consumption remained a key driver of growth, with unemployment levels staying low and purchasing managers indices indicating expansion in both services and manufacturing sectors. We anticipate this broad growth to continue, particularly in the United States, with a slightly slower pace in Europe and accelerated strength in Japan. Our views on this have remained consistent. Overall, we expect developed markets to sustain a growth rate of 2% or higher. As mentioned in previous quarters, while we believe inflation is largely receding and should continue to moderate in both the United States and the euro area, it is likely to remain above the historically low levels experienced during the last decade. Our projections indicate developed-market inflation in the range of 2% to 2.5%, allowing central banks to implement appropriate monetary policy adjustments. We anticipate the Fed lowering nominal policy rates as early as the second quarter. In fact, in March, Fed policymakers maintained their forecast of three interest rate cuts this year, which led to a rally in U.S. stocks, pushing them to all-time highs. Even with resilient domestic economic growth, we believe the Fed is likely to lower nominal policy rates as early as the second quarter. The European Central Bank is also expected to follow a similar path. The Bank of England has kept rates steady, also moving towards three cuts, while the Swiss National Bank made a surprise move by cutting rates by 25 basis points, becoming the first major central bank to initiate monetary policy easing. The first quarter witnessed continued strength in global equities, driven by earnings results that mostly exceeded expectations. Technology and communication services once again led the charge, but sector performance within the MSCI ACWI Investible Market Index (IMI) Index was broadly positive, with energy, industrials, and financials also posting strong returns. The United States appears to have achieved a soft landing, with corporate earnings generally surpassing expectations in the first quarter. The S&P 500 Index reached all-time highs, surpassing 5,000 for the first time in February. The “Magnificent 7” stocks (Apple (AAPL), Microsoft (MSFT), Alphabet (GOOG) (GOOGL), Amazon (AMZN), Nvidia (NVDA), Meta Platforms (META), and Tesla (TSLA)) remained among the top performers, but nearly 75% of S&P 500 Index constituents reported earnings above expectations. Notably, we expect the growth differential between the Magnificent 7 and the rest of the S&P 500 Index to moderate in the coming quarters as sector outperformance broadens. Europe demonstrated economic resilience during the first quarter, partly due to easing inflationary pressures. Declining energy prices boosted real incomes and consumption growth. Growth in Europe seems to have bottomed out at the end of 2023, and we anticipate improvement in the coming quarters. Earnings have exceeded expectations, and manufacturing PMIs have shown an upward trend. Japan emerged as one of the stronger markets during the first quarter, with investors optimistic about its macroeconomic outlook and structural tailwinds. On the macro front, Japan is finally experiencing positive inflation that appears sustainable. One of the key data points to come out of Japan in recent weeks was the result of the shunto wage negotiations. These negotiations resulted in the largest wage increase in Japan since 1991, at approximately 5.3%. We expect real wage increases to drive consumption growth, similar to what we have already seen play out in the United States and Europe. A change to Japan’s corporate governance code should lead to better capital allocation decisions and, we believe, improving returns. In terms of structural tailwinds, we are continuing to monitor a number of changes driving improvement in corporate performance. The Tokyo Stock Exchange has instituted a program targeting listed companies with low price-to-book ratios and low returns on equity. These companies are being challenged to devise a plan to improve their efficiency or potentially face delisting from the exchange. This should lead to companies focusing on profitability and business lines where they have competitive advantages and may lead to increased M&A activity. Lastly, Japan has historically scored poorly on corporate governance metrics, but a change to the corporate governance code aims to address things such as board independence and board diversity, which should lead to better capital allocation decisions and, we believe, improving returns. It remains an area of research focus for our team. China’s near-term outlook remains challenged despite recent monetary stimulus initiatives. We believe market performance in 2024 will depend largely on an economic recovery in which consumer confidence increases, the property market stabilizes, and youth unemployment improves. Geopolitical risks are also likely to remain an overhang to equity valuations. While tensions have eased in recent months, as the 2024 U.S. election cycle turns to the general election, we expect increased rhetoric and policy proclamations to accelerate. More than ever, we believe in the importance of active management within Chinese equities. Against this backdrop, we believe valuations of Chinese equities remain quite attractive relative to their own long-term averages and emerging market valuations more broadly. China is currently trading at about a 20% discount to emerging markets, versus a long-term average discount of 4.5%. More than ever, we believe in the importance of active management within Chinese equities. As the post-pandemic global economy normalizes, we continue to believe that growth will be more broadly distributed. This is also consistent with what we would expect during an economic expansion, when performance is driven by earnings growth, rather than valuations, and we expect a relatively strong breadth of profit growth. The flight to safety has given way to the search for growth, and thus is likely to result in a shift of leadership from some of the more recent obvious mega-cap winners. Recent performance of the industrial and energy sectors is evidence of this.
Global Equities Continue to Perform Well as US Federal Reserve and Other Major Central Banks Prepare for Interest Rate Cuts
