DFO Reflections – Q1 2024


After very high returns towards the end of 2023, we had expected a consolidation for the start of 2024. Instead, the first quarter was characterized by continued strong gains, especially for global stocks. Despite comparatively high valuations, it was again technology and quality stocks that set the tone.

Interestingly, we also experienced a phase in which the Nasdaq 100 was unable to beat the S&P 500 Index for the first time in many years. Although the index delivered a good result, the so-called ‘Magnificent 7 (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla)‘ seem to be transforming into the ‘Magnificent 5’, as both Tesla and Apple are struggling with several problems. As both stocks are heavily weighted in the Nasdaq 100, they seem to be holding the index back now.

Our active technology managers Franklin Templeton (R30) and Columbia Threadneedle (R45) both significantly outperformed the Nasdaq 100 Index. This supports the fact that it’s not always index investments that are ahead of the pack. One of the big winners in the first quarter was again Nvidia and other companies associated with the ‘artificial intelligence’ revolution.

Japanese equities, which ended their ‘slumber’ in 2023, also performed well in the first quarter, posting double-digit gains. The well-known Nikkei 225 Index finally reached a new high after more than three decades.

In addition to the popular American and Japanese stocks, the first quarter also saw gains in laggards such as equities from Europe and developing countries. The latter were able to benefit from the fact that stock markets in China and Hong Kong are slowly stabilizing. This is good news but doesn’t necessarily mean that there’s a bull market ahead.

The shares of small companies, where we see considerable catch-up potential, have also started to show some gains.

Just as global equity markets had a very good first quarter, we need to take a more differentiated view on global bond markets:

There are segments, such as global government bonds, whose prices are primarily dependent on inflation trends and associated central bank policies. On the other hand, there are corporate and developing country bonds, whose performance depends above all on the respective debt level of the issuer, and general market sentiment.

Whilst global government bonds have lost some ground again and are showing small losses, corporate and developing market bonds have mostly recorded a positive quarter. This is mainly for the fact that the US economy continues to be very dynamic, which makes it difficult for core inflation to fall further, even though it is currently quoted at 3.3% p.a., well below Fed fund rates.

By now, the opinion that the Fed will cut interest rates later and much less than expected at the beginning of the year, has become firmly established. This can be seen from the fact that 1 and 2-year US government bonds are still yielding close to 5.0% p.a. Despite those changed expectations, a good economy helps corporate profits, which is why corporate bonds may have held up better.

Bonds from developing countries benefited from lower U.S. Dollar interest rates compared to the previous year. In early 2023, interest rate hikes in America led to major distortions and excessive risk premia for emerging market bonds. With interest rates of more than 10.0% p.a. in some cases, many countries lost access to capital markets.

This has now improved considerably, as can be seen from rising prices and falling bond yields in these countries. Our clients, who are investors in Abrdn Emerging Frontier Bonds could participate in a meaningful way.

Asian high-yield bonds, which are still heavily dependent on the development of the Chinese real estate market, also had a decent first quarter, which benefited our investors in Pinebridge.

Risk premia for bank capital also fell in the first quarter, which is why we could witness attractive returns for our preferred managers such as Algebris and Principal Global.

In contrast to the strong U.S. economy, many European countries are worried about drifting into recession. As a result, European core inflation has been around 2.5% p.a. for several months and is now well below the central bank reference rate of 4.0%. This should give the ECB sufficient leeway to lower interest rates soon. This should help the European economy. The Swiss central bank has already reduced its reference rate by 0.25%, which indicates that the spectre of inflation in Europe has probably been banished. Today’s announcement of a Swiss inflation rate of just 1% compared with the previous year strongly suggests that this is the case.

Global commodities also had a very good first quarter, which is most likely related to the stabilization of the Chinese economy.

Gold also performed very well and seems to be attracting a lot of interest from young Chinese who are looking for new investment opportunities after many disappointments with investments in real estate and Chinese equities. We can only hope that they will not be disappointed again!

We still do not regard commodity investments as core portfolio building blocks. They should be considered supplementary investments, which an investor who sensibly combines quality shares with quality bonds can certainly ignore.

After small losses in the previous year, the U.S. Dollar was able to make some gains in Q1, possibly resulting from the fact that Fed Fund rates will remain higher than had been expected in January.