After a quarter of stellar performance, major developed market indices cooled off in April. Most of the correction resulted from the March US inflation figures, which came out higher than the previous months and higher than consensus. This led market participants to anticipate fewer and later rate cuts, immediately impacting equities and yields.

As the US led in performance on the upside, it is also correcting more on the downside. One could rightfully expect that firms’ Q1 results could be the culprit, but out of the 1/3 of companies that released earnings so far, the surprise is significantly positive. Really the only driving factor this month was the inflation figure that came out at 3.5% year-on-year, after stagnating at about 3.2% for many months and a consensus of 3.4%. The figure mostly driven by the service sectors, where salaries have increased by more than 5%, while real estate and commodities trended down. The market is now pricing one rate cut in the last quarter of this year (versus 7 rate cuts at the beginning of this year) and even a 33% probability of an increase in rates. While we saw very violent moves (up and down) in certain stocks following Q1 publications, index volatility has remained rather muted.

The preliminary US GDP figure for Q1 2024 came out at 1.6%, down from 3.4% and far from the 2.5% expectations. If the composite Purchasing Managers’ Index (PMI) is to be trusted, this is unlikely to improve in the near future, as manufacturing and services are both down close to neutral territory.

Europe is better off when it comes to inflation, the March figure remaining at 2.4%. GDP in the European Union is quasi flat, but that may improve as the composite PMI’s are up for the 6th straight months, though the disparity between manufacturing and services continues to widen in favor of services.

We mentioned at the end of last year, in our 2024 outlook, that geopolitics would take center stage this year. This is sadly materializing as the situation in the Middle East is far from improving following the direct confrontation between Iran and Israel.

Our summary recommendations

The inflation figure publication and the Iran/Israel escalation created short lived volatility episodes, which we took advantage of to structure a few products at attractive coupons. We will continue to act on such opportunities.

As bonds continue to mature, now is the right moment to reinvest in quality names with a duration of 2-2.5 years in order to lock in the current yields, which are once again attractive, above 5%.

We are finalizing our due diligence on funds in the private infrastructure and private credit space (including some with monthly liquidity) before making final recommendations in the coming weeks.

Chart of the month

The chart of the month shows the change in the US treasuries yield curve over the past 3 months. The dark green curve is the current yield curve, just below is the yield curve 1 month ago, followed by 2 months ago and finally the bottom curve 3 months ago. The biggest change came from the 5-year maturity going up almost 1 point.

In this context, we see bond holdings performing negatively (-2.8% this year for the US bond aggregate ETF) due to the marked to market effect. This explains the performance of multi-asset class balanced funds significantly lagging the equity indices. The major active funds are close to 2.5% performance this year, while the passive ETF sits closer to 3%.

With patience, bonds are eventually paid back at par. This is an opportunity to lock in attractive yields.

April – Inflation Return

May – “Sell in May and go away”

The Fed acts when it must, the ECB when it can and the SNB when it wants