Equity markets ended the first quarter on a strong note, with price returns of DM and EM indices exceeding +3% in March. On a YTD basis, Japanese equities remain the outperformers with +20% return, while US and EZ equities recorded a solid +10% return. Emerging markets are still lagging with a return barely positive this quarter.

The extended rally in DM equities this year has been impressive considering the Fed spent the start of the year pushing back on ultra-optimistic investors’ rate cuts expectations, and that earnings forecasts have remained stable so far in FY2024. However, the Fed preserved accommodative guidance despite the surprisingly challenging domestic inflation reports, signalling a faster tapering of its QT programme to maintain smooth liquidity conditions going forward in case of fewer rate cuts in 2024 as a result of a persisting inflation outlook. This deliberately supportive monetary policy guidance has convinced investors that the “Fed’s put” was still alive and well, mitigating their growing concerns of a “no landing” scenario which is looking increasingly more likely given the resilience of the US economy. In the meantime, manufacturing leading indicators have started to bounce back from their global cycle lows, triggering a rotation towards early cyclical and energy sectors, which are now sharing the equity indices leadership with the IT sector. The catch up of the laggards should provide welcome breadth to US equity indices, while investors await the upcoming earnings season to finally provide the bottom-up support needed to match currently high valuations. At 21x, the S&P500 forward PE for 2024 is stretched and reflects investors’ elevated complacency to the forward Fed Funds rate risk. By contrast, inflation is abating fast in Europe, which should be the first area to start a monetary easing cycle. This will provide further support to rather cheap equity indices with high dividend yields, and rising share buyback programmes.

The Fund was up +0.6% (A, USD) in March, lagging its short-term rate + 3% p.a. performance objective. Full investment of the portfolio was achieved early March, however the high turnover throughout the month diluted the portfolio income generation again. The volatility backdrop remained challenging as only modest spikes occurred. Finally, the portfolio duration was cut substantially with the bond allocation reduction. As of 28/03, the downside protection of the income notes allocation was +20.3%, with 5.9-month average maturity. The Fund’s running yield was at +9.7% p.a. (USD, gross).