Monthly summary – March 2024

What a difference a year makes! Even though stock markets performed well during the first quarter of 2023, the beginning of 2024 has been characterized by a much more ebullient mood. The dark scenarios that dominated investment banks’ strategies in early 2023 did not materialize and investors’ appetite for risk successively increased throughout the year, not least in the fourth quarter. This was apparent during the winter of 2023/2024, and in March 2024 most stock markets recorded new all-time highs.

Broadened investor interest

As opposed to the first two months of the year, investors’ interests in the markets broadened in March. Initially having been all about Artificial Intelligence and thus the handful of stocks known as the Magnificent Seven, pockets of secular growth in other areas, such as the treatment of obesity. Sectors such as energy and financials, developed even more strongly in March.

Delays in rate cuts did not dampen sentiment

Despite the frequent statements by central bankers, led by US Federal Reserve chairman Jerome Powell, that there was no hurry to cut interest rates, market participants took comfort in the fact that short-term rates would eventually start to decline on the back of falling inflation. Having initially expected cuts already in March, expectations were pushed back, first to May and then to June, without any discernable impact on the positive sentiment.

The upcoming US election coming into focus

With the presidential election in the US little more than six months away, investors became increasingly focused on the implications of the various outcomes regarding congress and of course the presidency itself.

Little to no geopolitical progress

Geopolitically, little or no progress was made in March. The Israeli-Hamas war in Gaza continued with negotiations for a ceasefire at an obvious stalemate. The same applied to the Russian full-scale invasion of Ukraine, now into its third year. With a lack of military resources and further aid packages delayed, not least in the US, Ukraine was pressed even harder on the battlefield by increased bombing by Russia. The terrorist attack on a concert hall on the outskirts of Moscow, leaving more than 140 people dead as well as the “re-election” of Vladimir Putin did not influence markets.

Oil market firmed significantly

The oil market, seen as a proxy for economic growth, firmed significantly in March. Fears of oversupply changed completely as geopolitical risks, continued production cuts by OPEC+ and increased demand caused prices to rise. This was also reflected in oil companies’ stocks, which made oil the best performing sector in March. Furthermore, a number of investment banks endorsed the sector for the first time in many years.

Fifth consecutive monthly rise for the world index

The strong beginning to 2024 continued in March and the world index rose for a fifth consecutive month, again with differences depending on investors’ base currency. All global sectors were up, led by energy and raw materials while consumer discretionary and information technology trailed the market. The same went for the regions with Europe and the US leading the way, while Hong Kong, after a strong February, once again lagged the world index.

OUTLOOK

Five strong months in a row for the healthcare sector. However, this was not matched in March by the equally weighted biotech index, XBI, which actually rebounded slightly. While semiconductors and energy have led the US stock market’s performance in the first quarter, healthcare has actually underperformed the sector average. Nevertheless, the feeling is that has been performing strongly.

What has impacted sentiment in the sector?

A number of factors have reinforced the impression that the healthcare sector has been doing significantly better: it has seen rising absolute numbers, and we have seen a good development since it bottomed during the fall 2023, at the end of October and beginning of November. Biotechnology has come back to life. A number of acquisitions, large and small, have confirmed that the stock market valuations have been fair. Company reports have shown that fundamental growth momentum is based on high healthcare utilization. Progress in clinical research has been tangible. Optimism is growing that healthcare and pharmaceuticals will not be the subject of new major reforms in the US in the coming years. Rate cuts should benefit the sector on a broad basis; large companies should then enjoy higher valuations in the form of P/E expansion and small companies could once again look forward to better conditions for capital raising through new issues and IPOs. Lower interest rates should provide better conditions for acquisitions, which benefit both the purchasing companies and the potential acquisition targets.

Optimistic, but risk aware

Even though the political focus of this year’s US elections is centered around other issues there are plenty of challenges regarding the long-term financing of public expenditures on healthcare. The high federal budget deficit will likely require budget cuts (or more positive for the sector, income tax increases) during the time period 2025-2031 and it is difficult to predict how and when this will impact the healthcare sector from an investing point of view. It is, however, likely going to affect market sentiment at some point in the coming years.

Even though the smaller companies seem set to enjoy improved conditions, we believe that it is still reasonable to have a broad diversification with the emphasis on large and medium-sized companies. We live in a troubled world where inflation could suddenly take off in a series of geopolitical entanglements. Fears might then reappear that future interest rate cuts in the US could be delayed over the summer, which in turn could lead to a small stock market correction. The likelihood of this should not be exaggerated but should not be overlooked either. And as the saying goes, the time to repair the roof is when the sun is shining.