Market Insights February 2024
Current Topics in Markets
The fixation for financial markets continues to be the likely timing of any interest rate cuts, in particular by the Federal Reserve in the US. Over the turn of the year, investors grew quite optimistic about the pace of rate cuts during 2024 with many anticipating the first reduction as early as Q1. Any objective analysis or comparison with history would have strongly suggested that this view was excessively optimistic. While inflation was clearly falling, it just seemed much too early to declare that a final victory had been achieved. And so it really should have come as no surprise when Jay Powell, Head of the Federal Reserve, in a recent statement, put a material dampener on rate cut expectations and hinted that the first reduction might be later than Q2.
So if we are looking at ‘higher for longer’ what does that mean for markets? First off, it will certainly result in some economic strains. Consumers will of course feel the pain as will debt laden companies, which will in turn lead to earnings disappointments and negative market reactions. A recovery in bond markets may also be delayed as a result. So for investors it is certainly not a time to be excessively bullish, as volatile periods are likely to be a regular occurrence over the coming months. For now, we are continuing to focus on value and income in making our investment selections for clients. Investments with these attributes are likely to prove the best haven in this uncertainty.
Equity Markets
Equity markets continued to perform in January, led by Japan and the US, up 5% and 3% respectively in euro terms. Once again China was the standout exception, down by almost 9% over the month. The Chinese market is arguably the cheapest it has ever been but, given the debt overhang and weak consumer sentiment, it may not be the time to buy just yet. The general market positivity tailed off at the end of the month as the realisation dawned that interest rates might not fall in the short term. The somewhat uncertain economic backdrop in many markets will probably mean plenty of volatile phases over the coming months. However, we are certainly not of the view that equities are to be avoided but it will pay to be selective.
Bonds
With many bond funds offering yields in excess of 5% per annum at the moment, there is little doubt that bonds offer the best value to investors then at any time over the past decade. While it may be late this year or even 2025 before we see a real recovery in bond markets, investors meanwhile are being handsomely compensated in terms of income while they wait.
Property
Sentiment towards property investment has become so negative that it is likely to be quite some time for recovery in this sector to get properly underway. However, the devaluation of property funds has been broad brush and has hit many funds exposed to subsectors which are still growing and are throwing off very attractive levels of income. As a result, the value opportunity is very convincing for investors who are willing to be patient.
Alternatives
Because of the significant income component in their returns many alternative sectors such as infrastructure and renewable energy have fallen somewhat out of favour since 2022 and been devalued in line with bond markets. Again we see a real opportunity for investors with some of these funds where many of the share and unit prices have fallen well below the value of the underlying assets and where yields have climbed towards double digit levels.
Our Fund in Focus for February 2024 is the – Bellevue Healthcare Trust
As always, you should only consider the investment views contained in this February Market Insights update in the context of your own attitude to risk and how such choices might impact your Asset Allocation model. Should you wish to discuss your investment portfolio, please contact Harvest Financial Services on 01 2375500 or email justask@harvestfinancial.ie.