The first quarter of 2024 is now rapidly receding in the rearview mirror, but investors are finding it harder than ever to shrug off the impact of recent market moves.
As the FT Unhedged column recently noted, S&P 500 momentum, as measured by its price relative to its 52-week moving average, was in the top decile (historically speaking) for February and March. 'Run your winners’ is hardly a novel philosophy, but as the appetite for all things AI grows more ravenous, the trend is becoming particularly pronounced.
This price performance means certain fund flow trends are also continuing to accelerate: remarkably, Calastone data shows that UK investors have put more into North American (ie US) equity funds in the four months since December than they did in the previous nine years combined. Investors will have their own views on whether that’s more evidence of momentum’s inexorable power, or a hint that all this is ultimately unsustainable.
The same argument, in reverse, applies to UK equity flows. Net redemptions in the first quarter reached their fourth-highest level on record, as per Calastone. At some point, something will have to give.
Yet, while Japan, Europe and India also continued their strong recent runs in the opening months of 2024, and bond funds underwhelmed once more, some narratives did start to change.
Financials funds, for example, had a much better time of it, posting an average return of 8.5 per cent, not so far off the dominant tech and US sectors. For once, it was the banks that drove this performance, thanks to big buyback promises from European and UK institutions, the paring back of rate-cut expectations, and an improving economic backdrop. Admittedly, all this wasn’t enough to help smaller US banks, whose commercial real estate exposures were the subject of renewed worry. Still, most UK-domiciled financials funds have minimal positions here.
The absence of US rate cuts also meant the dollar started the year on the front foot again. This time around, that didn’t condemn emerging market assets to another quarter of underperformance: the average fund in the sector posted a respectable 4.2 per cent return, ahead of the MSCI EM index’s 3.7 per cent. We talk a lot about the concentration of US indices, but here’s an example of a similar situation in a different region: Taiwan Semiconductor Manufacturing Company (TW:2990) accounts for 8.3 per cent of the MSCI EM benchmark nowadays; its 31 per cent rise in the first quarter contributed 2.5 percentage points of the index’s returns over the period.
And while Q1 was another period of runaway success for (most) of the US tech giants that dominate the S&P 500, there were signs that market breadth was broadening out. Analysts at Bespoke Investment noted that the number of US shares trading above their 50-day moving average stood at 79.5 per cent as of 11 March, a notable uptick from a month prior. Better performance for commodities and utilities, as well as financials and tech, were to thank for that.
All this is to say that we should never underestimate markets’ capacity to surprise us, or to test the received wisdom, no matter how powerful the draw (and success) of momentum proves to be. Fund flows and market moves aren’t necessarily trends to be bucked, but nor are they signs of a surefire bet.
