March market update and investment risks

The following reflects the general views of our Treasury & Investment Office (T&IO) and should not be taken as a recommendation or advice as how any specific market is likely to perform.

These views are as at the end of March 2024.

The value of investments can go down as well as up. Investors could get back less than they put in.

Please remember that past performance is not a reliable indication of the future performance.

Overview

The first quarter saw further declines in inflation across most major economies. However, with inflation in many countries still above central banks’ target levels, there was a shift in expectations regarding when central banks will begin to unwind the current tightening cycle.

The UK’s annual headline inflation rate fell to 3.4% in February, marking its lowest level since September 2021. Inflation also continued to slow in the eurozone where it came in at 2.6% in February. In the US, inflation proved more stubborn: the annual rise in core inflation, which excludes food and energy, was 3.8% in February, a slower decline than forecasted from 3.9% in January.

Switzerland became the first major central bank to kick off the rate easing cycle, reducing its key interest rate to 1.5%. The Bank of England and the Federal Reserve kept rates unchanged. Meanwhile, the Bank of Japan ended its negative interest rate policy, increasing rates for the first time in 17 years.

The UK economy expanded by 0.2% in January after ending 2023 with two consecutive quarters of negative growth. The US economy grew at an annual rate of 3.4%, bolstered by a strong labour market and robust consumer spending. Lacklustre domestic demand and low manufacturing activity in the eurozone resulted in continued economic stagnation. Simultaneously, weak consumer demand in Japan led to a relatively modest annualised expansion rate. China's economy is showing signs of recovery as increased factory output and investment growth contributed to a 5.2% annual increase in gross domestic product.

Equities (or shares)

The UK stockmarket made a positive start to the year as share prices extended their recent advance. However, the UK continued to lag other regions and the global market index as investor confidence was hurt by the lacklustre economic outlook. From a sector perspective, industrials led the way, while financials and healthcare also outperformed the broader market. In contrast, materials was the weakest sector. Real estate and utilities were notable laggards too. Meanwhile, large-cap stocks in the FTSE 100 Index outperformed smaller companies.

US equities kicked off the year with a robust rally and outperformed the global market. The S&P 500 Index repeatedly hit record highs as share prices continued their upward momentum from the end of last year. Canada’s stockmarket also made a positive start to the year.

European equities rose for the second consecutive quarter. Decent corporate earnings, the continued gradual decline in inflation and expectations of interest rate cuts helped fuel investors’ risk appetite. Information technology stocks led the way amid ongoing excitement about the potential of artificial intelligence.

The Japanese stockmarket rallied fiercely. Asia Pacific ex Japan lagged the FTSE World Index.

What do you mean by Equities?

• Equities are commonly known as "shares". When a fund buys a company share, it is investing in a company and, in exchange, receives a share of the ownership of that company. Shares give two potential investment benefits:
  
  
  • share prices may increase as the value of the company increases.
    
    
  • companies may pay dividends - regular payments made to shareholders based on how well the company is doing.

What are the general risks of this type of asset? 

• Over the longer-term (over 10 years), equities are considered to offer greater growth potential than many other asset types. However, the value of any investment can go down as well as up and so there is a higher risk of losing your original capital than investing in fixed interest securities (see below).

• The financial results of other companies and general stock market and economic conditions can all affect a company's share price, and consequently the value of any fund investing in that company.

Fixed interest

UK government bonds returned -1.6%, underperforming US government bonds and German government bonds. Persistent inflation led investors to scale back their expectations for interest rate cuts this year, which caused bond prices to retrace some of their gains in the previous quarter. The Bank of England maintained interest rates at 5.25% in March.

Global bond markets ended with a loss after a volatile start to the year as markets adjusted their expectations for the path of interest rates. 2024 began with market participants confident that rate cuts were on the horizon. However, in the US mixed inflation data and strong economic data throughout the quarter tempered expectations, with the first cut now priced in for June.

UK corporate bonds rose 0.2%, while high yield bonds returned 2.3%.

What do you mean by Fixed Interest?

• Fixed interest securities, more commonly known as "bonds", are loans issued by companies or by governments in order to raise money.
  
  
• Bonds issued by companies are called Corporate Bonds, those issued by the UK government are often called Gilts or UK Government bonds and those issued by the US government are called Treasury Bonds.
  
  
• In effect, all bonds are IOUs that promise to pay you a sum on a specified date and pay a fixed rate of interest along the way.
  
  
• Index-linked securities are similar but the interest payments and redemption value are normally increased by a price index e.g. for UK government index-linked securities, interest payments and redemption value are increased in line with the UK Retail Price Index.

What are the general risks of this type of asset

• On the whole, investing in Government or Corporate Bonds is seen as lower-risk than investing in equities. To date, no UK government has ever failed to pay back money owed to investors. But with Corporate Bonds there is a risk that the company may not be able to repay its loan or that it may default on its interest payments.
  
  
• Corporate and Government bonds are sensitive to interest rate trends. An increase in interest rates is likely to reduce their value, and hence the value of any fund investing in them.

Property

UK commercial property capital values fell in the three months to February 2024 (latest month for which data is available). According to property consultant CBRE, prices fell 1.3%, compared to a 2.0% drop for the three months to November 2023. With price falls decelerating in January and February, All UK commercial property recorded a small positive return (which includes rental income) over three months to end-February. Performance was most challenging in the Office sector. Whilst capital values also fell in Retail, declines in 2024 have been modest. Capital values in the Industrial sector were the most resilient. The UK government bond yield rise represented something of a headwind for UK commercial property, as investors typically compare property yields with gilt yields.

What do you mean by Property?

• For our funds we would mean commercial property investment. This generally means the fund is sharing in the returns from the ownership of some buildings (for example, offices and shopping centres).
  
  
• The value of the property may increase and tenants may pay rent to the owners of the building.

What are the general risks of this type of asset

• Property can be difficult to buy and sell quickly. Fund managers may have to delay withdrawal of money by customers from a property fund until they can sell some of the buildings the fund invests in.
  
  
• The actual value of a property is what someone is prepared to pay for it - an actual sale value. As sales are infrequent, interim valuations are based on a valuer's opinion and may be revised up or down from time to time. This can affect the value of a fund invested in commercial property, with the value possibly fluctuating significantly and could result in an investor not getting back the amount they originally invested.
  
  
• This leads to a number of risks for funds investing in property:
  
  
  • Cash could remain uninvested as property assets can be difficult to buy, leading to lower returns than expected.
     
  • The value of the fund may be reduced if a large number of withdrawals are requested and it is necessary for properties to be sold at reduced prices.
    
    
  • There may be delays removing your money from the fund if property cannot be sold.
    
    
  • Property fund valuations may be revised periodically, upwards or downwards.
    
    
  • Rental income is not guaranteed. Defaulted rent and unoccupied properties could reduce returns.
    
    
  • If the size of the fund falls significantly, the fund may have to hold fewer properties, and this reduced diversification may lead to an increase in risk.