There are many more investment opportunities now than the last decade combined  

-As a result of this overly optimistic sentiment, as of March 26^th, the US equity index S&P 500 and European stock index Euro Stoxx 50 were up by +2.1% and +3.8% on the month, bringing their year to date returns to +9.1% and 12% respectively. Emerging markets continued to benefit from this euphoria as well. Over the same period, global emerging market equity index MSCI EM was up by +2.2% on the month and +1.6% on the year. The global equity market returns reflected this optimistic outlook as well with global equity indicator MSCI All Country World Index (ACWI) up by +2.5% in March reaching +7.5% return since the year end.

–US bond yields continued to price in expected higher nominal rates in March, although they softened up slightly vs. February. As we elaborated in our previous issues, the sizable debt issuance by treasuries of larger economies like the US, European Union and Japan, and the expectation that major central banks including the FED may maintain the rates at their current levels longer than anticipated supported the higher nominal rates.

–As of March 26^th, Bloomberg Global Aggregate Bond Index, the benchmark for global investment grade bonds, and the Bloomberg Global Corporate Bond Index were up by +0.6% and +0.9% on the month reducing their year-to-date losses to -0.25% and -0.29% respectively. The High Yield Bond Index was up by +1.4% on the month and +2.4% on the year as investor confidence went up and therefore credit spreads between government and high yield bonds continued to tighten.

–Crypto, particularly Bitcoin, continued its impressive climb on the back of the approval of multiple Bitcoin ETFs in January by the US Securities Exchange Commission (SEC) which opened up the crypto market up to more mainstream investors. Bitcoin hit a record of $73,000 on March 13^th before easing below $70,000 gradually. As of March 26^th, both Bitcoin and Ethereum were up on the month by +13.7% and +6.7% bringing their year to date returns to a whopping +64.2% and +56.7% respectively.

–With inflation in the back of investors’ minds, the price of gold reversed course from February and had a sharp upside performance in March. Investors turn to gold as a store of value and a hedge against uncertainty and inflation. Case in point, as of March 26^th, the first month futures contract for gold was up by an impressive +7% on the month pulling its year to date return back into the positive territory with +6.1%.

–Crude oil had another positive month adding to its positive streak. As our readers wıll remember crude oil prices are driven by both demand and supply dynamics. The improving macroeconomic fundamentals supported the expected demand while the ongoing conflict in the Middle East, a major oil-producing area, and production cuts by OPEC+ countries cast a shadow on the future of crude oil supply. As of March 26^th, the first month futures contract for US crude oil WTI was up by +4.3% on the month, bringing its year-to-date return to +13.9%.

–Despite the positive outlook in global equity markets, the Turkish stock market had a weak March on the back of the approaching mayoral elections, lower-than-expected rate hike by the Turkish Central Bank. The recent departure of the first female governor of the Central Bank in February added to the ambiguity surrounding the Central Bank interest rate strategy. As of March 26^th, Turkish stock market index BIST100 dropped -4.2% in local currency terms (-7.1% in US dollar basis) on a monthly basis dragging its year-to-date return in local currency terms to +17.9% (+8.1% in US dollar basis).

–Investors can potentially exploit the current market conditions by a careful underweight in their equity allocations, possibly with a slight overweight tilt to their long-term maturity bonds. Credit investments, such as corporate and high yield bonds, which are priced off of government bonds, could also appreciate particularly for longer maturity instruments. Investors seem to be presented with more opportunities over the last year than they were over the last decade. However, only the smart investors who stay well informed and keep an open mind across all investments globally will be able to exploit them.

The developed markets’ equities continued their relentless upswing in March, marking the first quarter of 2024 as a solid positive return period in investors’ portfolios. This so called “melt up” can be blamed on the “expected” improvement in economic fundamentals and lower inflation which in turn is projected to trigger a drop in central banks’ benchmark interest rates as we have discussed in our last month’s issue.

This is all nice and dandy except for the fact that no one really knows if and when the global inflation will cool off and when central banks will feel comfortable enough to start reducing the rates. In fact, central banks themselves don’t know the answer to this question. Case in point, in his speech to the House Financial Services Committee on March 6th, Jeremy Powell, the Chair of the US Central Bank FED noted that the rate cuts “will depend on the path of the economy. Our focus is on maximum employment and price stability, and the incoming data as they affect the outlook, and those are the things we’ll be looking at.” He also noted that reductions will “likely be appropriate” later this year, “if the economy evolves broadly as expected” and once officials gain more confidence in inflation’s steady decline.

In other words, FED doesn’t know not only when they will reduce their benchmark rate but also if they may have to increase it first. That is a lot of ambiguity, which the equity markets don’t seem to care about. That is because stocks tend to first move on the basis of “expected” data rather than waiting for the actual macroeconomic data or central bank rate decisions to be released. Then they course correct based on actual data as we discussed in our previous issues.

EQUITIES CONTINUED TO SHOOT UP IN MARCH

As a result of this overly optimistic sentiment, as of March 26^th, the US equity index S&P 500 and European stock index Euro Stoxx 50 were up by +2.1% and +3.8% on the month, bringing their year to date returns to +9.1% and +12% respectively. Emerging markets continued to benefit from this euphoria as well. Over the same period, global emerging market equity index MSCI EM was up by +2.2% on the month and +1.6% on the year. The global equity market returns reflected this optimistic outlook as well with global equity indicator MSCI All Country World Index (ACWI) up by +2.5% in March reaching +7.5% return since the year end.

US YIELDS REMAINED ELEVATED DUE TO EXPECTED DELAY IN FED RATE CUTS

Similar to earlier in the year while US equities were focused on economic resilience, US bond yields continued to price in expected higher nominal rates in March, although they softened up slightly vs. February.

As we elaborated in our previous issues, the sizable debt issuance by treasuries of larger economies like the US, European Union and Japan, and the expectation that major central banks including the FED may maintain the rates at their current levels longer than anticipated supported the higher nominal rates. That being said, as the rates eased slightly long-term global bond indices saw a small gain throughout March, though their year-to-date returns remained in the negative territory with the exception of the high yield bonds market.

As of March 26^th, Bloomberg Global Aggregate Bond Index, the benchmark for global investment grade bonds, and the Bloomberg Global Corporate Bond Index were up by +0.6% and +0.9% on the month reducing their year-to-date losses to -0.25% and -0.29% respectively. The High Yield Bond Index was up by +1.4% on the month and +2.4% on the year as investor confidence went up and therefore credit spreads between government and high yield bonds continued to tighten.

CRYPTO CONTINUED ITS IMPRESSIVE CLIMB

Crypto, particularly Bitcoin, continued its impressive climb on the back of the approval of multiple Bitcoin ETFs in January by the US Securities Exchange Commission (SEC) which opened up the crypto market up to more mainstream investors. Bitcoin hit a record of $73,000 on March 13^th before easing below $70,000 gradually. As of March 26^th, both Bitcoin and Ethereum were up on the month by +13.7% and +6.7% bringing their year to date returns to a whopping +64.2% and +56.7% respectively. Bitcoin and Ethereum had a phenomenal 2023 with +157% and +90% gains respectively.

GOLD PRICE HAD A SHARP REVERSAL IN MARCH

With inflation in the back of investors’ minds, the price of gold reversed course from February and had a sharp upside performance in March. Investors turn to gold as a store of value and a hedge against uncertainty and inflation. Case in point, as of March 26^th, the first month futures contract for gold was up by an impressive +7% on the month pulling its year to date return back into the positive territory with +6.1%.

CRUDE OIL CONTINUED ITS SOLID CLIMB

Crude oil had another positive month adding to its positive streak. As our readers wıll remember crude oil prices are driven by both demand and supply dynamics. The improving macroeconomic fundamentals supported the expected demand while the ongoing conflict in the Middle East, a major oil-producing area, and production cuts by OPEC+ countries cast a shadow on the future of crude oil supply. As of March 26^th, the first month futures contract for US crude oil WTI was up by +4.3% on the month, bringing its year-to-date return to +13.9%.

TURKISH STOCKS GAVE BACK SOME OF ITS GAINS

Despite the positive outlook in global equity markets, the Turkish stock market had a weak March on the back of the approaching mayoral elections, lower-than-expected rate hike by the Turkish Central Bank. The recent departure of the first female governor of the Central Bank in February added to the ambiguity surrounding the Central Bank interest rate strategy. As of March 26^th, Turkish stock market index BIST100 dropped -4.2% in local currency terms (-7.1% in US dollar basis) on a monthly basis dragging its year-to-date return in local currency terms to +17.9% (+8.1% in US dollar basis). The monthly and year to date performance of BIST100 in US dollar terms underperforming its return in local currency terms is due to the appreciation in the greenback against Turkish Lira by +3.1% in March and +9.1% since the end of 2023.

SOME MARKETS ARE OVERSTRETCHED AND PRESENT GREAT RETURN OPPORTUNITIES

Markets that are overstretched either to the downside or upside tend to provide a lot of opportunities for investors as we discussed previously. Just in the last quarter equities and even crypto delivered returns that they would be expected to log over a year or longer. If these returns were based on actual data, they could perhaps be considered more permanent. However, there are still many unknowns such as where global inflation will land and how resilient global economy will prove to be if interest rates stay high for longer.

One other important unknown is the crude oil and more broadly energy prices. The recent spike in crude prices increases the likelihood that nominal rates may indeed stay higher for longer. To get a sense of crude’s impact on inflation, you can just look at some of the most recent headline consumer price index (CPI) numbers which include both energy and food prices. For instance, in the Canada and UK CPI came in lower than before but visibly higher than the forecasts. In the US, not only it was higher than the forecast, but it also came in higher than its February level. This is likely closely linked to increasing crude oil prices. If this trend continues, and looks like it may, economists and market players alike may be in for a surprise with not just delayed rate cuts but potentially one or more rate increases. This would mean sharp reversals in markets that have been buoyed by an exceptionally positive sentiment. You guessed right – we are referring to equities and crypto amongst others.

US SHORT TERM YIELDS COULD GO UP AS FED CONSIDERS RATE INCREASES

Should recession fears surface as a result, there is a likelihood that the US yield curve may shift up (as rate expectations go up) and may be more inverted. Just to remind our readers, when the yield curve is inverse, it means short term yields, which are generally driven by central bank rates, are higher than the yields on longer term government bonds which are driven by expected real rates and inflation in the long run.

In this scenario the short end might go up as FED considers rate increase(s), and the rates in the long end such as US Treasury bonds with 10- and 30-year maturities would drop, in a way similar to what happened between end of 2022 (red line) to end of 2023 (gray) as illustrated in the graph below.

Source: Bloomberg

Investors can potentially exploit this scenario by a careful underweight in their equity allocations, possibly with a slight overweight tilt to their long-term maturity bonds. This scenario could also allow for credit investments, such as corporate and high yield bonds, which are priced off of government bonds, to appreciate particularly for longer maturity instruments.

Most importantly, investors seem to be presented with more opportunities over the last year than they were over the last decade. However, as always only the smart investors who stay well informed and keep an open mind across all investments globally will be able to exploit them.

ELA KARAHASANOGLU, MBA, CFA, CAIA

International Finance Expert

karahasanoglu@turcomoney.com

ela.karahasanoglu@ekrportfolioadvisory.com

https://www.linkedin.com/in/elakarahasanoglu/