2024: First Quarter Wrap
Global equities posted strong gains in the first quarter of 2024, bolstered by the resilience of the US economy and continued excitement surrounding Artificial Intelligence. The US economy maintained its strong performance, supported by ongoing consumer spending. Expectations of interest rate cuts also contributed to the market rally, although the pace of these cuts is anticipated to be slower than initially anticipated.
In Asia, equities saw modest gains during the first quarter, with India, Japan, and Taiwan leading the MSCI Index, while Hong Kong and China ended the quarter in negative territory. Japan’s equity market experienced a notable rally, with the Nikkei reaching a new all-time high. Bank of Japan raised its key short-term interest rate to around 0% to 0.1% from -0.1%, marking the end of its eight-year period of negative interest rates.
In Europe, equities in the UK, Germany, and France saw gains over the quarter. However, both the British and German economies contracted by 0.2% year-on-year in the final quarter of 2023, attributed to escalating prices, heightened borrowing costs, and subdued external demand. In contrast, France’s economy expanded by 0.7% year-on-year in the fourth quarter of 2023, following a 0.6% growth in the previous three-month period.
Starting with the US: All time high with resilient economy
US shares demonstrated robust growth in the quarter, buoyed by strong corporate earnings led by the communication services and information technology as well as ongoing expectations of forthcoming rate cuts. While the pace of monetary policy easing may be slower than initially anticipated due to moderate but resilient US economic data, investor appetite for equities remained strong.
In March 2024, the Federal Reserve kept the fed funds rate steady at a 23-year high of 5.25%-5.5% for the fifth consecutive meeting, aligning with market expectations. Despite this, policymakers still intend to implement three interest rate cuts throughout the year. The annual inflation rate accelerated for a second consecutive month to 3.5% in March 2024, up from 3.2% in February. The Manufacturing PMI signalled expansion after 16 consecutive months of contraction, reaching 50.3 in March.
The US economy expanded by 3.1% year-on-year in the fourth quarter of 2023, the strongest growth in about two years, following a 2.9% rise in Q3. Overall, US GDP expanded by 2.5% in 2023, surpassing the 1.9% expansion in 2022 and slightly below the Fed’s forecast of 2.6%, according to the advance estimate. These figures indicate that while the Fed’s tightening campaign impacted the economy, the effects were less severe
than initially projected, as a tight labour market continued to support consumer spending. The unemployment rate declined to 3.8% in March 2024 from the previous month’s 3.9%, while the labour force participation rate increased to 62.7% from a near one-year low of 62.5% in the preceding periods.
The S&P 500 delivered its strongest first quarter performance in five years, achieving over 10% gains in the first three months. The index reached all-time highs, with 10 of the 11 S&P 500 sectors posting positive returns for the quarter. This shows diversification in market rise as Tech isn’t the only sector which is driving market.
Europe: ECB’s tightening policy pushing countries into negative growth
The Euro Area economy remained stagnant in the fourth quarter of 2023, following a 0.1% contraction in the previous three-month period, as persistently high inflation, record borrowing costs, and weak external demand continued to weigh on growth. Net exports subtracted 0.3% points from GDP growth, with exports remaining flat while imports increased by 0.6%. In 2023, the Euro Area economy expanded by 0.4%, revised down from a preliminary estimate of 0.5%, compared to a 3.4% expansion in 2022.
During its April meeting, the European Central Bank maintained interest rates at record-high levels for the fifth consecutive time, with the main refinancing operations rate remaining unchanged at a 22-year high of 4.5%, and the deposit facility rate holding steady at a record 4%. Consumer inflation in the Euro Area declined to 2.4% year-on-year in March 2024, matching November’s 28-month low and falling short of market expectations of 2.6%, according to a preliminary estimate. Energy inflation decreased by 1.8% in March, with the energy inflation in the Euro Area averaging 3.96% from 1991 until 2024. Over the quarter, there were signs of improving business activity in the eurozone, with the flash eurozone purchasing managers’ index (PMI) rising to 49.9 in March compared to 49.2 in February, indicating that business activity is approaching stable levels.
Eurozone shares posted gains in the first quarter of 2024 following signs of cooling inflation and energy prices. The information technology sector led the charge amid ongoing optimism over demand for AI-related technologies. Other top gaining sectors included financials, consumer discretionary, and industrials, driven by improvements in the economic outlook which boosted more economically sensitive stocks. However, utilities, consumer staples, and real estate were the main laggards during this period.
China: Investors losing confidence
Despite a modest rally in the middle of the quarter, Chinese stocks concluded the quarter with slight losses, as foreign investors remained cautious due to ongoing concerns about the Chinese economy’s outlook. Stocks in Hong Kong also experienced significant declines in the first quarter, with many investors diverting their attention to other markets amidst increasing Beijing control over Hong Kong and lingering fears about China’s post-pandemic economic recovery. The Chinese economy expanded by 5.3% year-on-year in Q1 of 2024, following a 5.2% growth in the preceding period. This marked the most substantial yearly expansion since Q2 of 2023, driven by continued government support measures and spending related to the Lunar New Year festival. Fixed investment grew by 4.5% during the first three months of 2024, the highest in nearly a year and exceeding the consensus of 4.3%. The Chinese government maintained a GDP growth target of around 5% for 2024, unchanged from 2023, compared to a 5.2% growth in 2022.
China recorded a capital and financial account deficit of USD 46.63 billion in the fourth quarter of 2023, with capital flows in China averaging USD 29.3 billion from 1998 until 2023. Foreign Direct Investment (FDI) into China declined by 26.1% year-on-year in January to March 2024, compared with a record inflow of investment seen in the same period of 2023, indicating the country’s ongoing struggle to attract more overseas funds to bolster its economy. Exports dropped by 7.5% year-on-year in March 2024, a sharp reversal from the 5.6% growth seen earlier, underscoring an uneven recovery in the country and dispelling hopes that global demand would continue to drive growth in the world’s second-largest economy. Among trading partners, cumulative exports for the first quarter notably decreased to countries in the European Union (-5.7%) and contracted to a lesser extent to the United States (-1.3%). Industrial production grew by 4.5% year-on-year in March 2024, significantly slower than the 7% growth seen in January-February combined, marking the weakest expansion in industrial output since last September, attributed to weaker rises in manufacturing, computer, and communications activities.
India: High growth fueled by strong performance in certain pockets
The Indian economy expanded by 8.4% year-on-year in Q4 2023, surpassing forecasts of 6.6%. Notably, the manufacturing sector continued its double-digit growth trajectory, while services, production of utilities, and construction sectors remained robust. However, the farm sector contracted by 0.8% due to adverse weather conditions and the El Niño effect. Projections suggest that the Indian economy is poised to grow by 7.6% in the fiscal year 2023-2024, exceeding the initial estimate of 7.3% by the Ministry of Statistics.
RBI maintained its benchmark policy repo rate at 6.5% for the 7th consecutive meeting, as anticipated, amidst persistent price pressures. The RBI Governor reiterated the commitment to reducing inflation to 4%. The central bank also upheld its economic growth forecast for fiscal year 2025 at 7%, with Q1 projections at 7.1%, while forecasting inflation to be at 4.9% for the same period. March 2024 annual retail inflation dropped to 4.85%, the lowest since May 2023, down from 5.09% in February, remaining within the RBI’s 2-6% target range in the medium term.
Regulatory bodies, including SEBI and the RBI, have been actively monitoring the financial markets to forestall any potential shortfalls and ensure the stability of the financial system. SEBI flagged “pockets of froth” in the small and midcap space, intervening in the IPO market and cautioning investors to remain vigilant. The RBI took decisive actions, revoking the banking license of a payment bank and suspending the gold lending facility of few NBFCs following irregularities. Additionally, the Hon’ble Supreme Court has taken steps to enhance the transparency of democracy by instructing banks to disclose the list and amounts of donors, particularly with general elections on the horizon. Despite prevailing concerns, the market has remained bullish, with the Midcap index recording approximately a 7% gain in the current quarter. India is gaining overseas investment in manufacturing as companies seeking to diversify supply chains outside of China, while the country’s physical and digital infrastructure has also improved. The optimistic outlook on India is well-documented in the media, with expectations of a stable political environment prevailing.
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