Investment Comment
5th April 2024
Looking back on Q1
Equities have started 2024 strongly, continuing the rally from the end of last year, with global equities rising 9.5% for a Sterling investor on the back of economic optimism. The US continues to lead the way driven by continued strong performance from the so-called “Magnificent 7” mega-cap technology stocks (Apple, Alphabet, Amazon, Meta, Microsoft, Nvidia, Tesla), although much of this is due to one stock, Nvidia, which is seen as the key beneficiary of the growth of AI, whereas others, such as Tesla and Apple look more challenged. While Technology was again the strongest sector, the rally has been broader based, reflecting a more positive economic outlook. China remains the laggard delivering another period of negative performance as it continues to work its way out of a property crisis and suffers from poor investor sentiment. This in turn has brought down returns for Emerging Markets (‘EM’) more broadly (China accounts for around 25% of the EM index) despite better performance from other large markets such as India and Taiwan. Closer to home the UK also continues to lag on the back of domestic weakness and because of large exposures to underperforming commodity and defensive sectors. With little or no technology exposure, the UK market will always lag in a tech-driven market and when economic optimism prevails other markets are more exposed to beneficiaries. This is one of the reasons why we favour a global approach and deliberately keep only a small UK equity weight in our portfolios.
Global Equities performed strongly in Q1 led once again by the US and the big tech companies. China was once again the laggard.
Source: Artorius, Bloomberg
Indices used are: Global – MSCI All-Country World, UK – MSCI UK, US – S&P 500, Magnificent 7 – Bloomberg Magnificent 7, Europe ex UK – MSCI Europe ex UK, Japan – MSCI Japan, Emerging Markets – MSCI Emerging Markets, China – MSCI China
The flipside of economic optimism is that an improving outlook for growth means future inflation may be higher. This throws doubt on if and when central banks can cut interest rates. At the turn of the year optimism was high that there would be significant interest rate cuts in 2024 (6 or 7 rate cuts were priced by markets in the US) but as economic data has improved, this optimism has been tempered; only 3 rate cuts are now expected. This change in expectations has driven a rise in bond yields and correspondingly bond prices have fallen. Therefore, it is no surprise that bonds have struggled so far this year. UK Gilts fell 1% in Q1 and global bonds were similarly negative. However, improved economic sentiment has seen a narrowing of credit spreads and riskier bonds, corporate, high yield, emerging markets, have outperformed their government equivalent. Headline yields remain attractive and we still believe that interest rate cuts are coming this year but for now returns are muted.
Bonds lagged in Q1 as bond yields rose reflecting reduced expectations for interest rate cuts. Riskier bonds (credit, Emerging Markets) outperformed Sovereign bonds as credit spreads narrowed.
Source: Artorius, Bloomberg
Indices used are: GBP Cash – Barclays Benchmark Overnight GBP Cash Index, UK Gilts – Bloomberg UK Government All Bonds, GBP Corporates – IBOXX Sterling Non-Gilts, Global Bonds – Bloomberg Global Aggregate Hedged GBP, Global High Yield – Bloomberg Global High Yield Hedged GBP, Emerging Markets Debt – Bloomberg EM Hard Currency Aggregate Hedged GBP
One other aspect of changing expectations has been on currencies. As the US outlook has improved, the US Dollar has strengthened, up 3% against a global basket of currencies. This benefits our US equity holdings giving a kicker to return when viewed in Sterling terms as we receive both strong market performance and currency appreciation.
The Great Cocoa Conundrum
Many may have noticed the latest victim of the shrinkflation phenomena over the Easter weekend. Cocoa – the main ingredient in chocolate - has had a stellar price rise this year. Having recently topped $10,000 per metric tonne and outperforming even AI-darling Nvidia year-on-year, manufacturers of chocolate are having to find ways to tame price pressures that have seen prices increase 12.6% annually, the unfortunate shrinkage in your eggs this Easter might well be a harbinger of further price pressure in the commodity.
Source: Artorius, Bloomberg
The cost pressures underlying the nation’s favourite sweet treat can be attributed to a small number of West African countries. Most notably Cote d’Ivoire and Ghana, the two biggest growers of cocoa which account for nearly 60% of global production. Many of the well-known risks associated with such a heavy reliance on a concentrated geographic area have come to fruition over the past 12 months. Extreme weather conditions have exacerbated the spread of the black-pod and swollen-shot viruses resulting in lower cocoa yields. Couple this with narrow margins received by farmers and subsequent underinvestment in production process improvements, it is then no surprise that supply shortages are beginning to bite.
World Cocoa Bean Surplus/Deficit
As at 1st Jan each year
Source: Artorius, Bloomberg
Reports from the International Cocoa Organization suggest that we’re unlikely to see a resolution in supply-side issues in the near future, they estimate a 11 percent decline in supply year-over-year[1]. Easing global climate patterns could alleviate some of the more worrying structural issues in cocoa production. The current El Niño weather system (that warms sea surface temperatures, causing erratic rainfall patterns in West Africa), is expected to gradually weaken this year, supporting cocoa yields. Whilst the longer term path for cocoa prices may face upward pressure from supply side constraints, the futures market may have gotten ahead of itself. At the time of writing futures prices have fallen roughly 5% since the resumption of trading after the Easter bank holiday on Tuesday. Nevertheless it may be worth stretching out Easter chocolate supplies as long as possible, even the Great British Bake Off is considering axing chocolate week over pricing concerns!
All expressions of opinion reflect the judgment of Artorius at 5th April 2024 and are subject to change, without notice. Information has been obtained from sources considered reliable, but we do not guarantee that the foregoing report is accurate or complete; we do not accept any liability for any errors or omissions, nor for any actions taken based on its content. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested. Past performance is not a reliable indicator of future results. Nothing in this document is intended to be, or should be construed as, regulated advice. Artorius provides this document in good faith and for information purposes only. Reliance should not be placed on the information contained within this document when taking individual investments or strategic decisions. Artorius Wealth Management Limited is authorised and regulated by the Financial Conduct Authority. Artorius is a trading name of Artorius Wealth Management Limited.
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