Making sense of the market bounce

Global equity markets rebounded strongly in April, as concern about the impact of the war in the Persian Gulf on the economy receded. This was due to indirect talks between the US and Iran, which were mediated by Pakistan.

The MSCI All Country World Index rose 10.2%, bringing its year-todate gains to 6.8%. Performance was led by the US (S&P 500 +10.5%) and emerging Asia (+13.8%), while other major equity markets underperformed despite posting strong gains for the month.

In fixed income markets, government bond yields rose slightly, returning close to recent highs, reflecting concerns about rising inflation and more hawkish comments from central banks. However, investors' increased risk appetite drove a decline in corporate bond spreads. In currency markets, the US dollar lost almost 2% for the month but remains within the trading range it has held since June last year. Finally, the price of oil and other commodities, including precious and industrial metals, rose as a result of the ongoing blockade of the Strait of Hormuz.

The apparent contradiction between commodity price trends and the all-time highs reached by stock markets can be explained by examining corporate earnings. Earnings in Q1 and the upward revision of analysts' estimates for full year 2026, once again driven by the technology sector, helps to make sense of markets' sudden recovery after the March sell-off.

Furthermore, stock markets have also found comfort in the progress towards the nomination of Kevin Warsh as the new Chairman of the Federal Reserve. Warsh is regarded as being more inclined to reduce interest rates based on the anticipated disinflationary effect of the spread of artificial intelligence, as he explained during the Senate Banking Committee hearing. Moreover, Warsh favours reducing the size of the Fed's balance sheet and simplifying its composition, factors that help explain the rise in Treasury yields.

Starting with a neutral exposure to equity markets and a slight underweight to fixed income instruments, market drift during April led a balanced portfolio to a slight overweight in equities and a more significant underweight in bonds. We believe this allocation is appropriate given the current macroeconomic and financial environment.

Equities remain supported by strong earnings, while fixed income markets continue to be challenged by the threat of building inflationary pressures from high energy prices. Within equities, we maintain a preference for US equities while reducing exposure to Europe and Asia.

Asset Allocation

Global Allocation

During the month there was a strong positive effect from corporate earnings on markets, with significant upward earnings revisions, although China is a notable exception. Furthermore, economic growth has surprised on the upside. It may still be some time until the impact of the supply shock is fully reflected in the data though, whereby if the conflict isn’t resolved by the end of the second quarter, this will only start to come through in the third quarter. The re-scheduled Trump-Xi meeting in mid-May will be a focal point and could provide a breakthrough. However, if there is no ceasefire and the Strait of Hormuz is still closed positioning may need to be re-assessed to factor in downside impact.

For our equity allocation we are maintaining the market drift, moving slightly more overweight, supported by strong earnings. A swift recovery in the Strait of Hormuz and a continuation of previously priced interest rate cuts could make us more bullish in the future. Balancing this out, our fixed income allocation is being taken further underweight, sticking with the drift. We are still concerned about residual inflation pressures that could still exist post a Middle East ceasefire, expecting a gradual reopening of the Strait of Hormuz and oil capacity getting back on track. We are happy to remain overweight in alternatives and hold our cash positioning at neutral, looking for opportunities when they arise.

Fixed Income

On the credit side, EUR high yield fundamentals are a bit worse than before the crisis, which in turn favours USD high yield. In response, exposure is being balanced across the currencies, moving EUR from neutral to underweight. For emerging market local currency bonds we note currency risks in Asia, however duration is low and long-term we remain supportive of the asset class. Convertible bonds have seen strong performance and we are happy to maintain an overweight position. No changes are being made to our rates positioning. Last month, our investment grade allocation was added to across currencies, all sitting at an overweight position given a positive underlying macro environment. Portfolio duration remains around 3 years, slightly under the benchmark’s 4 years.

Equities

Our European equity exposure is to be reduced from overweight to neutral. Should a ceasefire be announced, we anticipate that Europe may rally, stopping us from going underweight. To balance this out we are adding into US equities, increasing the overweight. Within Asia Pacific equities, China & Hong Kong exposure is being reduced as overall macro indicators have weakened with flat credit growth. In addition, bottom-up momentum has deteriorated although valuations remain supportive in our view. Meanwhile Korea is being upgraded to neutral as there has been strong macro improvement driven by exports and domestic demand, as well as being a beneficiary of the artificial intelligence trade. Similarly, Taiwan is a beneficiary, so this is being increased to overweight. Japan has bounced back to new highs on a technical basis and earnings revisions have been positive, so we feel that it no longer makes sense being underweight and are upgrading this to neutral. Finally, our UK underweight is being reduced although we do acknowledge that there remain political risks in the country.

Equity Sectors

Equity Sector Views

US
We remain positive on financials as we expect banks should benefit from deregulation, interest margin expansion and a pick-up in investment banking activity. We are neutral on technology as artificial intelligence and cloud spending continue to grow, but there are elevated concerns on the return of this spending as well as disruption risks. As we believe that energy price increased could be more structural in nature, energy exposure is moving from neutral to overweight. Healthcare remains our preferred defensive sector, although we are reducing exposure, following market drift. Meanwhile utilities is being slightly cut due to pressure on long-term bond yields.

Europe
Our energy weighting is being increased from neutral to overweight, following the recent pullback and the constructive outlook. With materials there is growing evidence that momentum is improving in chemicals as well as an early indication of improving earnings. As a result, the allocation is being added to, but still remaining slightly underweight. The healthcare sector has lagged the market rebound so we are rebalancing down with the drift putting it at a marginal overweight. Our utilities weighting is also being cut to underweight, taking profits after strong performance and elevated valuations. Finally real estate exposure is to be reduced due to the recent increase in long-term bond yields.

UK
Industrials remains our favoured sector, particularly defence. Energy is our second largest overweight, followed by utilities for their defensive characteristics. The ongoing conflict in the Middle East has caused significant disruption to markets and fundamentally changed the oversupply narrative in energy markets. Even if a resolution to the conflict is reached in the near term, we expect the impact from the closure of the Strait of Hormuz and damage to energy infrastructure to linger. As such, we had previously raised our exposure to energy and reduced exposure to materials and financials.

Alternatives

Hedge fund dispersion is high, and last month we added to them as a source of diversification, increasing our overweight position. Amongst strategies, equity long/short and equity market neutral can offer downside protection. We also like Commodity Trading Advisers (CTAs) and Macro, and should we see a deterioration in the situation and a more prolonged downturn they tend to offer countertrend properties. Inflation linked securities should also help with diversification. To balance out the addition to hedge funds we reduced exposure to commodities, with gold accounting for the majority of the weighting. Our insurance overweight was also lowered last month, being mindful of liquidity risks as we enter hurricane season.

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