WealthSelect Managed Portfolios quarterly report - March 2024 (Q1 2024)

Our market summary

A combination of strong company earnings, improving economic data and broadly easing inflation, saw global equities leap 9.3%. Developed markets notably outperformed emerging markets with AI-related stocks continuing to generate great interest, especially in the US. Even so, Japan was the top performing regional equity market. Against a backdrop of robust economic gains and changing expectations as to the timing of interest-rate cuts, government bonds declined while corporate bonds were mostly flat.

US

Despite downward revisions to the expected pace of US interest-rate cuts, US equities surged 11.4% over the quarter on the back of robust corporate earnings and resilient economic numbers. The Magnificent Seven were especially prominent. Sector wise, the best returns came from communication services, energy, technology, and financials. Meanwhile, more interest-rate sensitive sectors, such as real estate and utilities, struggled.

Europe

European equities trailed those in the US and Japan but still delivered a 7% gain. As in the US, tech stocks led the field thanks to the ongoing exuberance for all things AI. Stocks in the financials, consumer discretionary and industrials sectors also prospered against a backdrop of steadily improving economic data and declining inflation, which boosted cyclical stocks. Stocks in the utilities, consumer staples and real-estate sectors trailed.

UK

The UK equity market also trailed once more. It returned 3.7%, partly due to its high weighting to value stocks during an ongoing rally in growth stocks. The mood was further spoiled by data showing the UK economy fell into a technical recession in the second half of 2023 as consumer spending struggled in the face of higher inflation and interest rates. Cyclical stocks, such as financial, industrial and energy companies, generally outperformed.

Emerging markets

Emerging markets gained 3.4%. Despite leaping 9% in February, Chinese equities finished the quarter down 1.3%. Peru was the top performer. Like Columbia, it benefited from interest-rate cuts. Conversely, Turkey performed well after recent rate hikes, which were welcomed by investors as a return to conventional monetary policy. Taiwan and India also outperformed. While Korea, South Africa and Brazil all trailed, Egypt was the worst performer.

Fixed income

UK gilts trailed other government bonds. They declined in the face of elevated UK service inflation and wage growth, and the Bank of England reiterating that UK rates would need to remain restrictive until inflation returned to target. US Treasuries also lost ground. The US Federal Reserve (Fed) kept rates on hold but, by the end of the quarter, markets were pricing-in just three US rate cuts in 2024, down from a forecast six rate cuts at the start of January.

UK equity

UK: Still long way back

Although UK equity markets delivered positive returns for the quarter, they trailed some way behind other developed markets. The news that the economy had fallen into a recession in the second half of 2023 compounded the issue for a main UK index with a heavy bias toward old economy stocks, such as mining, oil, energy, and banks, but little to show in the more fashionable technology space during an extended rally in all things AI-related.

Artemis funds lead the hunt

The two best performers among our UK holdings were the Quilter Investors UK Equity Opportunities and the Quilter Investors UK Equity Large Cap Income funds, both of which are managed by Artemis. The former notably outperformed the broader UK market in the first two months of the year when the UK market was in decline, but was then able to keep up with the significant market rally seen in March.

Contrasting approach

Conversely, the Quilter Investors UK Equity Large Cap Income Fund performed much in line with the broader UK index in January and February but outperformed in March. There were a number of stock-specific drivers behind the fund’s progress including ITV’s disposal of its holding in Britbox, Pearson’s impressive earnings results, and 3i, where strong results from an underlying retail company in its portfolio helped to drive the share price higher.

Fixed interest

Bond markets decline in face of robust data

There was a major shift in sentiment in fixed-income markets as the continued strength of the US economy brought the number of US rate cuts being priced-in for 2024 down to the level that the Fed has implied through its so-called ‘dot-plot’ projections. The dot-plot provides a de facto US monetary policy forecast as each member of the interest rate-setting Federal Open Market Committee (FOMC) assigns a dot to represent what they think will be the appropriate mid-point of the federal funds rate range in the future. This meant losses for our government bond holdings while our corporate bond holdings ground out modest positive returns.