What’s driving the equity rally?

What’s driving the equity rally?

Markets & Investment Update
18 March 2024
This note contains an overview of our market views, what we are watching, and our portfolio strategy. These developments may not mean changes to your portfolio so please contact your Client Advisor for the latest update on your portfolio.

At a glance 

Is the sky the limit for equities? 
Equity indices from the US to Japan and through Europe continue to make record highs week after week. Last week was no different, although some indices closed flat such as the US S&P 500. There’s a structural element to this rally, which we carry in our portfolios. It’s the AI revolution that has sent related shares (AI, semiconductors, and “big tech” alike) through the roof. For example, did you know that the combined value of the so-called “Magnificent 7” (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) is as large as the economies of Germany, Japan, and India combined? But it’s not just AI hype; economic drivers such as improving growth prospects and expectations of interest rate cuts are also boosting equities. That said, we believe a global economic slowdown is still likely, so there could be temporary setbacks for equities along the way. Therefore, we think the risk/reward for equities is reasonably balanced over the next 12 months, which is why our equity holdings are neutral relative to our long-term allocation. 
Bonds on the backfoot
Government bond yields rose last week (meaning prices fell) following the rise in US inflation, but we don’t think this will be a long-lived trend as it was in 2023. Despite the slight uptick, inflation has been trending downwards and central banks will likely cut interest rates in 2024. As such, the peak in bond yields is probably behind us. While the US Federal Reserve will be in no hurry to cut rates at its meeting this Wednesday, it will still likely lean towards rate cuts around the middle of the year.
A big change for Japan
In 2016, Japan set negative interest rates and hasn’t budged ever since. But now there’s been growing speculation that the Bank of Japan (BoJ) will change its stance following strong wage negotiations and Japan’s stock market reaching a record high. The first step for the BoJ would be raising the policy balance rate from -0.1% to 0%, which could happen at its March 19 or April 26 meetings. We think the BoJ is unlikely to go much higher than 0% at this stage, which is reflected in Japanese bond prices and the yen exchange rate. Any major surprise could, therefore, move markets. 
Surprise rate cuts in Europe?
We could see the first Western central bank rate cut this week as markets are not excluding a surprise rate cut from the Swiss National Bank (SNB) on Thursday. This comes after SNB President Thomas Jordan declared that they have reached monetary policy stability. This supports our view that the Swiss franc will likely depreciate against the euro over the course of 2024. We also expect the Bank of England on hold this week, but to hint that rate cuts are not that far.
Is spring coming to Europe?
While the Eurozone economy has been alternating between stagnation and slight contraction since mid-2023, it looks as if activity is no longer deteriorating. This week’s purchasing managers’ indices, while still weak, are expected to show a continuation of this gradually improving situation. If this improvement continues over the coming months, we will reduce our recession probability forecast and, potentially, consider adjusting our cautious Eurozone positioning, for example in equities. But this still looks premature for now, as recession risks still linger and seem underappreciated to us. So, for now, we hold low-volatility equities in Europe to protect against a sluggish growth environment, along with a reduced exposure to Eurozone equities.

How we’re positioned in flagship portfolios

Staying balanced
For about a year and a half, we’ve held fewer equities and more bonds in portfolios compared to our long-term strategy. In February, given better US economic prospects and interest rate cuts from mid-year, we brought both back to neutral. As such, we increased our equity holdings and reduced bonds. 

For a detailed overview of our allocation in flagship portfolios, please visit our latest Counterpoint.

Important Information

Information correct as of 18 March 2024.

This document is designed as marketing material. This document has been composed by Brown Shipley & Co Ltd ("Brown Shipley”). Brown Shipley is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered in England and Wales No. 398426. Registered Office: 2 Moorgate, London, EC2R 6AG. 

This document is for information purposes only, does not constitute individual (investment or tax) advice and investment decisions must not be based merely on this document. Whenever this document mentions a product, service or advice, it should be considered only as an indication or summary and cannot be seen as complete or fully accurate. All (investment or tax) decisions based on this information are for your own expense and for your own risk. You should (have) assess(ed) whether the product or service is suitable for your situation. Brown Shipley and its employees cannot be held liable for any loss or damage arising out of the use of (any part of) this document.

The contents of this document are based on publicly available information and/or sources which we deem trustworthy. Although reasonable care has been employed to publish data and information as truthfully and correctly as possible, we cannot accept any liability for the contents of this document, as far as it is based on those sources. 

Investing involves risks and the value of investments may go up or down. Past performance is no indication of future performance. Currency fluctuations may influence your returns. 

The information included is subject to change and Brown Shipley has no obligation after the date of publication of the text to update or amend the information accordingly.  Accordingly, this material may have already been updated, modified, amended and/or supplemented by the time you receive or access it. 

This is non-independent research and it has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and that it is not subject to any prohibition on dealing ahead of the dissemination of investment research.

All copyrights and trademarks regarding this document are held by Brown Shipley, unless expressly stated otherwise. You are not allowed to copy, duplicate in any form or redistribute or use in any way the contents of this document, completely or partially, without the prior explicit and written approval of Brown Shipley. Notwithstanding anything herein to the contrary, and except as required to enable compliance with applicable securities law. See the privacy notice on our website for how your personal data is used (https://brownshipley.com/en-gb/privacy-and-cookie-policy).

© Brown Shipley 2024