As March drew to a close in the first quarter of the year, investors continued to benefit from a very favourable environment.
Performance over the quarter was already in the double digits: the global equity indices gained nearly 11% and March posted a fairly decent return of more than 3%.
In fixed income, the decline seen in end-2023 continued. 10-year sovereign yields in the US and Germany reached 4,30% and 2,40% respectively. The robustness of the US economy is key to understanding these movements. This can be seen in the particularly solid economic figures at the end of the first quarter: real-time forecasts of economic growth for Q1 reached almost 3% on an annualised basis. Naturally, the rate cuts expected at the beginning of the year have been postponed, which explains the gradual rise in rates.
In addition, this economic strength has spontaneously proved to be a positive factor for the equity markets. Economic growth, supported by consumption, is a determining factor for future corporate results, hence the strong performance of equities.
We are therefore faced with a fairly healthy market driven by the “good news is good news” principle.
The dynamism of growth does not make investors fear a second wave of inflation, since the current disinflation is very promising. Moreover, the markets continue to expect growth to remain robust without triggering a second wave of inflation.
In addition to this particularly favourable economic environment, there are also very encouraging structural factors that are driving the market. This is mainly the theme of artificial intelligence (AI), the real driver of the technology sector, which promises considerable productivity gains once AI has been adopted by all economic players.
And while some investors are worried about high valuations, it should be remembered that valuation indicators are at much less extreme levels than those of the dot-com bubble of the late 1990s and that we are far from the excessive levels of market concentration achieved in the past.
From a sectoral point of view, the time has come for rotation. Energy is recovering after renewed tensions in the Middle East and attacks on refineries on the Russian-Ukrainian front. Sectors that also performed well included Materials, driven by metals such as copper, gold and silver, followed by Utilities and Financials. “Star” sectors such as Technology and Consumer Discretionary have therefore given way to less favoured sectors up to now.
Overall, we continue to recommend a neutral exposure between equities and bonds. We believe it is appropriate to continue to invest in equities as long as economic strength and the AI theme allow. In addition, fixed income continues to perform well, especially after the recent rise in rates. The few rate cuts to come, coupled with an attractive level of carry, make the asset class attractive.
In terms of sectors, our preferences are shifting towards more aggressive ones such as Consumer Discretionary, Finance and Communications Services. These sectors should benefit from robust economic growth, a level of interest rates that should remain fairly high and the AI theme.
In fixed income, we have a preference for European rates, which rose to the same extent as their US counterparts despite a much stronger US economy.
