Equity strategy and market outlook – April 2024

Welcome to the April edition of Edison Insight. We open with a strategy piece by Alastair George, who believes that expectations for a period of steadily declining US interest rates during H224 have been confounded by a string of above-consensus US inflation and employment data. Federal Reserve policymakers are now rapidly rowing back from doveish comments made only a few weeks ago. As a result, both US interest rates and long-term bond yields have risen in recent weeks. Nevertheless, we expect this to be a transient phenomenon as higher market rates are likely to prove self-limiting. In Europe, inflation is returning to targeted levels and widening interest rate differentials are driving the US dollar higher. Growth momentum in Europe may have improved but remains well below levels seen in the US, which means the European Central Bank may now be cutting rates ahead of the US Fed.  There has been a clear rotation in sector performance. Sectors that underperformed in Q1 are outperforming in Q2 as higher interest rates call into question high growth stock valuations. An improving economic outlook is also underpinning a revival in cyclical sectors. Among developed market peers, the UK appears to be set to benefit with a sector composition overweight cyclicals and underweight growth. We maintain a neutral outlook on global equity markets. We believe there is still time to consider taking profits in growth segments of the market. For bonds, we believe that US 10-year yields of 4.5% or more will offer diversification benefits in the event of any unanticipated US slowdown, while yields are still likely to trend lower from current levels as interest rates and inflation fall later in the year.

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