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Market commentary

11th April 2024

Global developed equity markets

As the old saying goes, investing is simple but not easy.

It is simple to look back at market data today and wish that we had, for example, owned more US equities and less UK and emerging market equities over the past ten years, given their annualised returns of around 14.5%, 5.0% and 6.5%, respectively. Could have, would have, should have!

The part that is difficult is knowing that you need to build and own a robust portfolio for the future that will work for you across a potentially wide range of unknown market events and outcomes. If one were to be influenced by the recent returns of the US market and allocate more assets to it, one would risk having all of their investment eggs in one basket.

As it is, the US already represents around 62% of global market capitalisation across developed and emerging markets. Students of market history will recall that the US market suffered what has become known as the ‘lost decade’ in the 2000s where the market went sideways over a ten-year period.

Take a look at the patchwork quilt of returns below illustrating the returns of the stock market of various developed markets each year. It is evident that there is no discernable year-by-year pattern that an investor can take advantage of. Interestingly, the US stock market has not been the best performer in any of the past 20 years! The best performing market was in fact Denmark which delivered an annualised return of almost 16%, which compares to 11% for the US and 9.4% for the developed markets as a whole.

The patchwork quilt of developed markets 2004-2023

Source: Morningstar Direct © All rights reserved (refer to endnote).  MSCI country and world indices in GBP terms.

The reality is that markets work pretty well at incorporating information into prices and trying to beat the market – through either market timing or stock picking – is a tough game, with very few winners.

Simply making your investment bed out of a diversified market exposure and lying in it over time, makes a huge amount of sense in the absence of market timing signals and an ability to foresee the future.

’Since the future cannot be predicted, it is impossible to specify in advance what the best asset allocation will be. Rather, our job is to find an allocation that will do reasonably well over a wide range of circumstances.’

William Bernstein, author of ‘The Intelligent Asset Allocator’

Sleep well at night under your patchwork quilt of equity markets and feel the warmth of being invested across all markets.

Emerging markets

By investing in Emerging Markets, there is the expectation you should receive a premium for taking on higher risks, although that outperformance is extremely volatile and by no means guaranteed. Since 1950 the average additional return above developed markets has been about 2% a year.

There are lots of reasons to be negative about Emerging Markets. China, the biggest constituent of the index is at the centre of geopolitical tensions in the South China Sea and has suffered economic weakness from the aftermath of COVID and debt-based problems with its property market.

We think that investors should expect additional returns as compensation for this additional risk and for long term investors having an allocation to these countries will help the performance of your portfolio over time. We allocate 15% of growth assets to Emerging Markets.

Defensive assets

Interest rates were centre stage in 2023 with speculation of when Central Banks would stop raising rates. In 2024 we may see a similar speculation of when rates will start to fall.

Policymakers continue to face a difficult balancing act. With inflation falling, do they start to cut interest rates with the risk that this reignites inflationary pressures, or keep interest rates high and possibly tip their economies into recession.

Bank of England Governor Bailey confirmed that interest rate cuts are “in play” at future meetings, European Central Bank President Lagarde laid the groundwork for bringing rates down, possibly as soon as June, and the US Federal Reserve forecasts pointed towards a median of three 0.25% rate cuts by the end of 2024.

Markets were disappointed many times in 2023 as interest rates rose above the levels forecast at the beginning of the year. We may see the same in 2024 as Central Banks will keep a close eye on economic data and make their decisions accordingly.

In the UK the Bank of England has warned that core inflation, taking out some of the impacts of energy and food prices, remains persistent. Although the headline rate of inflation continues to fall, the monetary policy committee will be more reluctant to cut rates if this core inflation stays high.