April saw equity and bond markets move together again, with both asset classes falling over the month. Higher than expected inflation and economic data caused markets to push back the date of anticipated interest rate cuts which weighed on bond and stock markets. This rising correlation of equities and bonds, a feature of the last few years, means that portfolios need to be more diversified than was necessary in the previous two decades.
Equity markets were weak in April, falling 2.8% in Sterling terms over the month. However, there was considerable dispersion across markets with the UK and emerging markets delivering positive returns over the month. Chinese equities were the standout winner with the holding in the Hang Seng Technology ETF rising over 5% in the month.
Fixed income markets continued to struggle against at backdrop of stickier inflation. Prices fell across the yield curve as expectations of interest rate cuts were paired back further, including in the US and UK. In the UK, the market began the year pricing interest rates to fall from 5.25% to 3.5% by December. However, stickier inflation and more resilient growth than expected, led the market to now expect rates to be somewhere between 4.75% and 5% by year end. UK gilts fell 2.9% over the month, impacting investment grade bonds whilst fixed income markets linked to US Treasuries were also weak. Within portfolios, an underweight exposure to these asset classes and an emphasis on inflation linked bonds helped to limit losses in fixed income.
Diversifying assets once again proved their value by delivering uncorrelated returns in April when equities and bonds both fell. AQR Managed Futures and Pacific G10 Macro stood out, delivering solid performance in the month.
