In the first quarter of 2024, global stock markets rose 8% in USD terms, continuing their strong performance from 2023. In contrast, developed market bonds fell more than 2% on persistent inflation concerns, eroding much of the gains from the previous year.[1] Continued uncertainty surrounding the speed and timing of central banks’ interest rate shifts, and large amounts of capital sitting on the sidelines in money market funds, has led to a shift towards riskier assets such as longer-dated bonds and corporate credit. Cash may shift. and stocks could stay in that range for the rest of the year.[2]
In the last quarterly edition of Markets in Focus, we explored the changing relationship between government bonds and stocks. This quarter’s posts will focus on the relationship between corporate bonds and stocks. Given the continuing equity bull market, we examine the risks prevailing in the U.S. market and the implications for investors who choose to exit cash positions in 2024. This quarter also marks the beginning of integrating fixed income commentary into this quarterly analysis. Provides a comprehensive view of the public market.
Reduced diversification benefits from credit brought in in Q1
The current situation in global credit markets has been shaped by high coupon tailwinds, the possibility of an impending rate cut, and growing confidence in a US “soft landing.” However, we believe caution is warranted given the lingering effects of the shock related to the COVID-19 pandemic.
In the following video, Andy Sparks, Head of Portfolio Management Research at MSCI, discusses the bond market relationship across the credit spectrum, as well as the relationship between the bond and equity markets over the four years to 2024 and the first quarter of 2024. It explains the relationships within. Year.
Putting Q1 bond returns into perspective
Download transcript (PDF, 99KB)
Using the MSCI Multi-Asset Class Risk Model, we observe that the correlation between corporate spreads and government bonds remains high, suggesting that the diversification benefit of fixed income investments continues to decline. Around the world, both investment grade and high yield credit markets are more closely tied to equity markets.
Trust has struggled as a means of diversification since the COVID-19 pandemic
Global stocks with distinctive regional differences in style performance
Global stocks have risen nearly 50% since the start of 2020, but still show patterns that have emerged during the coronavirus pandemic. Over the past four years, the market has swung wildly between value and growth stocks, creating divergences in regional performance.
MSCI ACWI Investable Market Index (IMI) Growth Stocks[3] Although it drove value throughout 2020, the trend reversed after the announcement of vaccine breakthroughs and continued in tandem with rate hikes in 2022. The AI-driven rally that began in late 2022 meant growth stocks were surging again. However, these broad characteristics mask important regional differences.
The 2020s will be characterized by turbulent changes in value and growth conditions.
In the first quarter of 2024, the so-called Magnificent Seven drove the growth uptick in U.S. stocks, despite a divergence in fundamentals. Additionally, European growth stocks led by companies such as Novo Nordisk A/S and SAP outperformed, increasing the weight of European companies in the MSCI Thematic Megatrend Index and contributing to the strong performance of momentum factors. Masu.
Outside the U.S. and Europe, value was driven by emerging markets (EM) and Japan, pushing Japan to the top of the developed markets by revenue over the past year, with gains also reflecting improvements in corporate governance.
The United States and Japan were leaders in developed markets, while India and Taiwan were leaders in emerging markets.
In the first quarter of 2024, developed markets, led by the United States and Japan, significantly outperformed emerging markets when measured in US dollars. Emerging markets ended the quarter slightly higher, with gains in India and Taiwan offset by continued declines in Chinese stocks.
All MSCI Thematic Indices had a tough start to the year, with the exception of Innovative Technology, which significantly outperformed the MSCI ACWI Index.
Top performers in Q1: Japanese stocks and momentum factors
Focus on US valuation
A recovery in U.S. stock growth throughout 2023 and into the first quarter of this year could heighten concerns that the U.S. market will be “perfectly priced” relative to other regions. The following chart shows that his MSCI USA index is nearing its highest value in the past 20 years, based on a relative valuation based on the difference between forward returns and real bond yields. Using the same criteria, international stocks were not at the same level.
In the current situation where equity volatility has decreased and, as a result, put option premiums have decreased relative to historical norms,[4] Investors wary of high U.S. valuations may believe this situation offers the potential for reasonable downside price protection against increased volatility.
US relative rating is higher than historical average
Escape from the sidelines
Based on valuations and other signals such as macroeconomic sensitivities and sentiment, our adaptive multi-factor framework prioritized value factors as of March 31, 2024, as it did at the end of last year. Investors looking to redeploy capital in the coming year may want to consider the impact of changes in the relationship between equity and credit and widening regional disparities when reconsidering capital allocation.
