Stock and bond markets had a very strong start to the year, with global equities rising over 7% in sterling terms. This was in response to some signs of improving data across several factors globally. The relatively mild winter in Europe helped reduce the risk of a winter recession, as gas storage was depleted less than expected, lowering electricity costs. Further, positive news from China, which reopened its economy and moved away from the COVID-zero policy that stifled growth for much of 2022 was a positive for global growth. Finally, recent inflation prints have come in at around expectations, with US CPI at 6.5% year-on-year, down from 7.1% the month prior and a peak of over 9%. This was taken by the market to mean that inflation is finally starting to fall as a result of central bank policies – which also caused yields to fall across bond markets.
Within equities, Europe was the strongest performing region, given the economic boost it experienced because of lower natural gas prices. Emerging Market equities were also strong given the news regarding China. We are positioned to be overweight all markets except the US, which we believe may suffer because of high starting valuations and the possibility of a weakening dollar, as was the case over January.
Within Fixed Income – returns were strong across markets as yields fell, in part as a result of inflation data appearing to have peaked across many western economies. Our positions in US and UK Inflation linked bonds rallied as a result.
Within Alternatives, our allocation to diversified UK REITs added value, as they benefitted from a broader rally of risk assets and falling bond yields. We think discounts to NAV, where share prices are pricing below the value of the assets within the vehicles in this space compensate for their interest sensitivity.
Within Diversifying Assets our holding in the Pacific G10 Macro rates fund benefitted from movements in yield curves. A holding in the AQR Style Premia fund, which goes long and short various based on metrics such as valuation also generated positive returns.
