In a quarter where market sentiment has continued to align with central bank signals on interest rates and inflation, Jesmond Mizzi, managing director of Jesmond Mizzi Financial Advisors, offers a comprehensive analysis of market behaviour during the first quarter, providing key insights into future trends.

Markets have started the year with a strong rally. Is this still a continuation of the positive sentiment that we had towards the end of last year?

JM: I would point to AI, which has continued to perform strongly, coupled with market optimism about potential interest rate cuts. We still had some volatility, though, especially after US Federal Reserve (FED) chairerson Jerome Powell appeared to have returned to his “higher for longer” mantra with respect to interest rates.

Inflation has proven difficult to bring completely under control and we still get macroeconomic data reminding us of that from the time to time.

The reality is that markets got ahead of themselves. In fact, in January some were talking about the possibility of there being six rate cuts in 2024, but this was never realistic.

Some were also looking forward to the US election and hoping that this influences monetary policy, but Powell has also made it clear that the FED will continue to act independently of short-term political matters. I think we will have one or two cuts by the end of the year, probably towards the end of the year.

What about Europe? Are we seeing more or less the same trend?

JM: After European Central Bank president Christine Lagarde originally voiced scepticism about potential rate cuts, it now seems that the ECB might move to do so before the US. The reason is once again what we’re seeing favourable inflation numbers and macroeconomic indicators.

I would say that while in the US, the focus is on inflation and on the labour market, in Europe it is more linked to geopolitics. Europe is very dependent on energy prices, so there is always the question of whether it has adequately prepared for the winter.

What is key in my view is the fact that markets now seem to be more aligned with central banks as far as interest rates and what changes can be expected. Of course, should the ECB move before the FED, it would also need to grapple with the fact that this would most likely result in a weaker euro going forward. Nothing is clear-cut, and things could yet change but at the moment this is what looks most likely.

Are we seeing the rally spread to other sectors this year?

JM: Yes, in fact we are looking at defensive stocks and stocks which for one reason or another haven’t really recovered after 2022. In the US, if the economy continues doing well, we will start to see growth spread to other sectors like real estate and utilities which are still underperforming.

There will be those who hate to miss a rally and they might be tempted to jump on board now, but there are other parts of the market that are yet to see a strong drive upward and which will present good, less risky opportunities once interest rates start to come down. This includes bonds where we’re still seeing a relatively weak performance given the high interest rate climate.

If you look at the figures, you can see that the here, again, the market is awaiting clarity on interest rates. For example, in February we saw a spike in high-yield bond-buying because if interest rates go down, refinancing will be easier. The bond market is waiting for a significant change to the interest rate scenario, so timing is everything.

As and when interest rates go down, prices of bonds are likely to go up and yields fall, so there is still potential upside for investments in good quality bonds. This isn’t to say that the recent decline in equity markets won’t present opportunities, but volatility will remain, especially with the recent geopolitical instability.

What about Japan? Given the Bank of Japan’s decision to raise interest rates and the recent trends in wage growth and inflation, is this a market you think is attractive?

JM: I think the latest developments are certainly positive and its looks as though Japan is back. The markets have welcomed this and there seems to be more confidence both in the country and its economy. Crucially this confidence seems to exist both locally and abroad. It wasn’t unexpected and there was a clear push on the part of the government for this to happen. It’s always good to see Japan leading again.

Are we seeing a similar picture in the UK?

JM: Yes, there’s a sense of optimism, but it’s also entangled with pre-election issues. The UK seems poised to be next in line for interest rate adjustments. This time last year, the conversation was centred on controlling inflation, which was a challenge everywhere except in Europe, primarily due to high mortgages and lower economic growth compared to the US. The UK’s economy was significantly impacted by mortgage and energy costs, which dampened consumption.

Additionally, we’re beginning to see the long-term effects of Brexit crystallising, moving beyond the point where COVID-19 can be solely blamed. With inflation trending in the right direction, there’s room for the government to offer some relief, which could influence interest rates to fall.

What about the investment potential in the UK?

JM: The UK market has been out of favour for some time but the potential shift towards Labour which could foster closer ties with Europe could be beneficial, especially for the FTSE, given its heavy concentration on energy and banking.

While the UK market has underperformed compared to other European markets, we’re seeing signs of recovery in real estate, albeit not to pre-COVID levels. As the UK economy, a significant player in exports, potentially moves closer to the EU, it could see advantages in that sector.

This interview is issued by Jesmond Mizzi Financial Advisors Limited and does not intend to give investment advice and the contents therein should not be construed as such. The company is licensed to conduct investment services by the MFSA, under the Investment Services Act. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. For more information, contact Jesmond Mizzi Financial Advisors Limited of 67, Level 3, South Street, Valletta, on  2122 4410, or e-mail jesmond.mizzi@jesmondmizzi.com.