April 2024 MPS Market Review

• After a blistering close to 2023, and first quarter of 2024, market momentum finally stalled in April, with most major indices suffering negative performance.
• Market fears centre upon the stubborn inflationary backdrop across the developed world, most notably in the US – the globe’s dominant economy.
• A succession of US CPI prints surpassing expectations affectively cornered the US Federal Reserve, forcing a pivot to a far less dovish strategy.
• Indeed, financial markets have moved from anticipating 6-7 US interest rate cuts in 2024 to just 1-2 at the start of May.
• Extrapolating the trend of inflation surprises and markets may soon start to fret that interest rate hikes are back on the table.
• Such an environment would likely be received poorly by markets, interpreting such a move is designed to deliver a more severe economic contraction, and more emphatically cull the inflation menace.
• Explanations for the resurgence in inflation are multiple and varied, though a common theme rests upon US consumer resilience, if not outright strength.
• Such confidence to go out and spend stems from the health of the jobs market coupled with pandemic accrued savings, as well as receding fears of spiralling interest costs.
• An interest rate hike is not the base case, however, with pandemic savings now likely dwindling, and leading US jobs market data, such as a weakening hiring rates and falling quits rates, pointing to a further slowing in wage gains.
• Absent accelerating wage inflation, it is less probable for an inflationary spiral to take hold.
• It is hard to take such a benign view in the UK given stickier wage inflation, however, a generally weaker economic growth environment creates a high bar for a resumption of interest rate hikes. 
• The core view, therefore, is the disinflationary trends within the US can resume and, in so doing, reinstate themselves as a support for risk taking.
• The combination of lower inflation, more accommodative policy and resilient growth has been described as a 'Goldilocks' scenario. This analogy refers to an economy which is neither too hot (where inflation and monetary policy are on the rise - setting the economy up for a fall) or too cold (in recession).
• A 'Goldilocks' outcome has often been a favourable backdrop for equities as it points to more durable economic strength. This relationship may not unfold this time; however, it is a driving force behind a positive equity bias.
• Though most equity markets struggled in April, it was pleasing to see the UK bourse deliver both positive relative and absolute gains across the month, not least given Invesco’s MPS increased its allocation to this market in February.
• Of note was the resurgent Energy sector which, given its dominance in domestic markets, proved a powerful tailwind.
• Given the geopolitical troubles which prevail, the relative hedge UK markets provide against a surging oil price provides helpful portfolio diversification, though this is not the sole reason for an increased allocation.
• UK equity market valuation remains highly compelling versus global competitors, which is further bolstered by the strength of collective balance sheets and high level of dividend yield on offer.
• Prospects for better economic performance (versus some very downbeat expectations) look enticing too, as real incomes creep higher as resilient wages overcome fading inflationary prints. 
• Emerging Market equities also achieved some success in April, perhaps on hopes Chinese authorities were looking a little more assertive in their efforts to address a stuttering economy.
• Such a narrative will likely prove choppy, however, as any Chinese response will likely fall shy of what markets are hoping for, particularly given the scale of its housing market travails.
• Given how downbeat sentiment is towards the region, however, it may only take an amelioration in the economic backdrop to reignite investor interest.
• We should also note the success of the Emerging Market asset class does not exclusively rest upon the fortunes for Chinese stocks, with nations such as India and Mexico playing an increasingly important role.
• In fact, it is India which, thus far, has proved the darling of the Emerging Market investment community. And on that basis, and given the prevailing General Election (the world’s largest), this is an opportune moment to get an economic, political and investment update on the region; which is exactly what we provide in this month’s ‘Time in the Market Podcast – A Spotlight on India’.
• Reflecting upon bond markets and it will be of little surprise the hawkish turn in both inflationary data and central bank commentary has led to a period of ongoing struggles for the fixed income asset class.
• As we have articulated, however, a resumption of disinflationary trends catalysed by weakening (though not collapsing) labour markets should pave the way for bond markets to enjoy a return to form.
• Indeed, investors should also be mindful the disinflationary forces may yet gather pace as the ‘long and variable lags’ of interest rate policy further impact the economy.
• Whilst certain mortgage deals may allow segments of the economy to avoid the full force of interest rate hikes, not every consumer will be in such a fortuitous position.
• What is more, many channels of financing, such as credit cards, overdrafts and corporate lending will be much more sensitive to interest rate changes and will continue to bite into the economy as we move through the year.
• Investors should brace themselves for a more volatile period ahead, therefore, as markets fret between extremes of soft-landing euphoria, inflation resurgence and recession.
• Recognising how uncertain the outlook remains, as well as our philosophical belief in the need for humility when investing, MPS portfolios strive to seek appropriate levels of diversification to meet the investment challenges ahead.
• Relative to stocks for example, high quality corporate and government bonds might offer a more defensive return profile in the face of less encouraging growth outcomes, particularly given the increase in yields observed over recent months.
• Alternative asset classes also assist Invesco in its efforts to help diversify portfolios in a more troubling period for stock markets.
• Stay safe, stay well, and please get in touch if you wish to discuss any part of the Invesco MPS strategy further.

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