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. Comments on recent performance are not indicative of future performance.
At a glance
The end of negative interest rates in Japan
After eight years in negative territory, the Bank of Japan (BoJ) lifted its key policy rate to 0-0.1% last week. It was an important move but widely expected, so markets carried on as usual. The yen continued to weaken (it’s now at its lowest levels this century vs the dollar), helping Japanese equities climb further to new record highs. This is a prime example of markets “pricing in” actions by a central bank. It’s usually only when central banks surprise markets that they react significantly. One could argue that with interest rates still very low, there is room for more increases but the likelihood of large and fast rate rises as we saw in the West is low given Japan’s elevated public debt while other central banks are turning more accommodative. An unexpected move like that next month would likely spark volatility.
Another week, another record for equities
Japan wasn’t the only equity market hitting record highs last week; the US and developed markets more broadly were as well. Last Wednesday, the US Federal Reserve (Fed) held interest rates at 5.25-5.5%, but it was Fed Chair Jerome Powell’s comments that boosted markets. Powell painted an encouraging economic picture of still robust but moderating economic growth and falling inflation, warranting lower interest rates. This is a favourable environment for stocks. As Powell also dropped enough hints that interest rates would come down this year, government bond prices rose too (as yields fell).
US economic growth might be stronger than expected, putting the Fed in a tough spot
While we believe June is likely to be when the Fed will start cutting rates, it is still three months away. An unexpected jump in inflation along the way could spur volatility; we’ll be watching the personal consumption expenditure price index, the Fed’s preferred measure, this Friday. Although we expect US inflation to fall in 2024, the resilience of the economy means that positive surprises are possible. At this stage, US economic growth is tracking 2% this quarter, somewhat higher than our base case. Should further positive economic surprises materialise over the next few weeks, this could lower the odds of seeing four 25 basis point rate cuts this year and make three cuts more likely. A central bank rate path that’s still uncertain, stretched valuations and lingering (geo)political risks are reasons why we’re not increasing our equity exposure just yet. Tactically, we’re aligned to our long-term asset allocation.
The Swiss National Bank kicks off the rate-cutting cycle in Europe
The Swiss franc was the weakest currency last week after the Swiss National Bank (SNB) surprisingly lowered its key policy rate to 1.5% from 1.75%. Inflation is no longer an issue in Switzerland, so more cuts are likely, supporting our view of further weakness in the Swiss franc. We think more central banks in Europe will follow through between June and September. Last week, the Bank of England and Norges Bank paved the way for interest rate cuts, which also weighed on the Pound sterling and the Norwegian krone. The European Central Bank has good foundations to cut rates too given the ongoing stagnation in growth and falling inflation – this week we’re watching inflation data for France, Italy and Spain. That said, currency weakness could be more limited as they will likely start to cut rates when the Fed does, weighing on the US dollar. The Swedish central bank, this Wednesday, could be another central bank signalling that rate reductions are coming soon.
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 25 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
