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Market Update – March 2024

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As we approach the end of quarter one, and indeed the tax year, global markets have continued to perform well following positive data on inflation. The UK Budget announced better-than-expected projections, despite economic shrinkage in the second half of 2023. World elections and interest rate cuts remain key themes for 2024.

The Budget

The 2024 Budget brought in a few changes, most notably, a 2% cut to National Insurance and a higher income cap for Child Benefit. Other measures, including the British ISA and a fairer method of Child Benefit means testing have been touted but will need further consultation before they can be implemented.

Inflation and economic growth projections are better than estimated in the Autumn 2023 statement, indicating we are headed in the right direction.

Of course, there have been criticisms of the Budget, including concerns over public finances and debt. Tax thresholds remain frozen and public services are still under pressure. However, with an election expected later in 2024, it remains to be seen which measures will remain and which will be rolled back depending on who is in government.

How Will Upcoming Elections Affect Your Investments?

2024 will be a year of elections, with the UK, the US, and many other countries heading to the polls.

Historically, elections have not caused a major disturbance in the market. But 2016 was a politically significant year, with the Brexit vote in the UK and the election of Donald Trump in the US, both of which did cause some ripples in the market. With many global powers shifting to the right and the possible re-election of Donald Trump, it is possible that 2024 will be equally significant.

In the UK, Labour remains ahead in the polls but nothing is certain. It’s possible that the outcome of the election will affect markets temporarily, but it is the longer-term decisions over the economy that will have a lasting impact.

What’s Next for Interest Rates?

The Bank of England has held interest rates at 5.25% this month. This is the fifth successive meeting at which rates have remained level, following an aggressive campaign of increases between December 2021 to August 2023.

Inflation has dropped to 3.4%, which is still 1.4% above target, but has improved significantly from the peak of over 11% in late 2022.
The question is therefore whether rates should now start to be cut or if they need to be held for longer.

Lower interest rates could bring some much-needed relief to households and smaller businesses in the wake of the cost-of-living crisis.

The governor of the Bank of England, Andrew Bailey, has heavily hinted at upcoming rate cuts, while other economists within the BoE feel that this is premature.

In the US, the Federal Reserve has reiterated plans to cut rates this year following positive data on employment, growth, and inflation.

Are We Still at Risk of Recession?

Recession has been a concern for some time, throughout the recent inflationary crisis and market volatility. However, many developed economies are in a better position than previously suggested, with a ‘soft landing’ on the cards.

When many people think of a recession, memories of the global financial crisis surface. Volatile markets, unemployment, and a troubled property sector had a lasting impact on the economy which can still be felt today.

But all it takes to declare a recession is two consecutive periods where the economy shrinks. Technically, the UK was in recession for the second half of last year, with GDP falling overall by 0.7% in 2023.

The economy is expected to expand and contract over a normal cycle, and a technical recession is usually nothing to worry about. However, the UK economy has faced under-investment since the 2008 financial crisis, as well as restricted trade following Brexit. Changes will be needed if we are to stay resilient and competitive in a global market.

The UK Market

Despite concerns over a recession, the UK All Companies sector has produced strong returns of 4.2% this month, ahead of other developed economies. The FTSE 100 is slightly ahead of this at 5%, indicating a tilt towards larger companies.

The sector is still lagging behind North America, Europe, and Japan on a three-month basis and over the longer term.

Part of the reason for this is that the UK has the lowest business investment in the G7 following Brexit. Calls have been made for politicians to make bolder decisions to make it easier for partners to trade and invest.

The Global Outlook

US stocks have continued to rally, with the North American sector producing returns of 3.8% this month. The US market has continued to lead over a three-month basis and over the longer term.

The S&P 500 has returned its best quarter in five years, with a total return of 10.2% since the start of the year. The tech-focused Nasdaq produced similar growth of 9%. The Magnificent Seven makes up around 75% of the US stock market and the growth has been heavily tilted towards these larger companies. Conversely, US small caps have seen their worst performance compared with larger companies in over 20 years, with the Russell 200 index returning 24% since the beginning of 2020, compared with the S&P 500’s 60%.

The European sector has produced comparable performance at 3.5%, although like in the US, growth is tilted towards a small number of larger companies, with the Granolas accounting for 60% of European gains in the 12 months to February 2024. Inflation figures are looking positive, having slowed to 2.5% in the Eurozone, suggesting that the European Central Bank should shortly start to cut interest rates.

The Asia Pacific sector continues to lag behind other regions, although March has been a positive month with growth of 2.8%. Continuing turmoil in the Chinese property market has increased pressure on banks following the collapse of lender Evergrande in 2021. The region also faces slowed economic growth, a weak demand for borrowing, and declining local government investment.

Please don’t hesitate to contact a member of the team for more information on any of the topics covered.