After a powerful run from q4 2023, equities paused in April, with many of the momentum stocks simply running out of, well, momentum and leading many to revisit the old adage of 'Sell in May'. Meanwhile, sentiment in the bond markets soured further as the prospect of rate cuts receded - although we remain of the view that the main purpose of rate cuts now is to ensure the stability of bond markets themselves. The best performance once again came from China and Hong Kong as these markets start a (long delayed) catch up as distressed sellers are cleared from the markets. Markets are generally trying to establish some trading ranges for the summer months and while foreign policy is increasingly bellicose as led by politicians facing re-election as well as the defence and energy sector lobbyists, western trade lobbyists are also hard at work, erecting tariff barriers and trying to co-opt third parties to do the same. While this is not good for their own consumers, it is also fighting the reality of high quality, much cheaper, products coming from Asian competitors, most of whom are not also facing high energy costs. Nor is a strong dollar helping. As such, many of the big global companies are facing serious competition in third party markets and investors, also looking to diversify portfolios, are starting to look at their overseas competitors.

The rally in asset markets in Q4 has evolved into a new bull market for equities, but not for bonds, which remain in a bear phase, facing problems with both demand and supply. As such the greatest short term uncertainty and medium term risk for asset prices remains another mishap in the fixed income markets, similar to the funding crisis of last September or the distressed selling feedback loop of SVB last March. US monetary authorities are monitoring this closely. Meanwhile, politics is likely to cloud the narrative over the next few quarters with the prospect of some changes to both energy policy and foreign policy having knock on implications for markets/

The Bond markets have curbed some of their enthusiasm over rate cuts while momentum stays with US tech. Japan and EM ex China continue to behave well, although China continues to behave like a bear market, This has little to do with fundamentals like value or earnings and more to do with perceptions of risk and uncertainty that are driving liquidity flows. However, we would note that the stock market is not the Bellweather of the Economy that it is in the US and that intervention will take place only for stabilisation. They do not believe in the so called Fed put, or the wealth effect.

Year in Review notes are often separated from Year Ahead pieces, but we find it helpful to combine the two in order to get context. 2023 was a much better year for 60:40 funds as both markets mean reverted from a terrible 2022. In Bonds, the mean reversal came late, following a dramatic selloff in Q3, the compelling bond math finally brought long term investors out of cash, taking hem from oversold to if not overbought, then fair value given rates are being eased not slashed. In Equities, the dominance of the Magnificent 7 meant active investors either made money not owning them in 2022 or owning them in 2023. Few did both. This year opportunities are likely to lie elsewhere, suggesting diversification either within the US market or geographically. International markets largely traded sideways with a positive year end (Europe, UK, EM ex China) or appeared to have started new bull phases - Japan and India. China, which remains in a bear market thanks to weak sentiment and aggressive narrative management is the equivalent of buying Meta in January 2023. One for the brave, but also one to watch. Politics will play a large part in narrative management this year and thus be key to risk management.

The traders unofficial year end at Thanksgiving produced a lot of mean reversion including powerful short squeezes in Equities and bonds and even if they have run out of momentum they have catalysed cash to move into Equities and bonds, focussing the mind of Asset Allocators on the challenges for 2024, first and foremost being that they need to generate real returns and beat cash rather than simply hug it.