Saxo Morningstar High Dividend USD Q1 2024 commentary

*Performance in USD as of 31/03/2024 and net of all costs including management fees.

Market review

The first quarter of 2024 was a positive one for risk-tolerant investors. This is especially true for those with high equity exposure, with stocks advancing in most parts of the world. At a global level, the Morningstar Global Markets index rose by high-single digits for the quarter and over 20% for the last year in local currency terms. The gain also marked the fastest first quarter rise in five years for the S&P 500, with every sector increasing except real estate. Among defensive assets, bonds broadly treaded water, with yields inching higher after a period of volatility.

Investors appeared to shrug off news that the central banks may postpone rate cuts, as board members await additional cooling signs amid resilient global economic activity, a strong job market and stabilising inflation readings. Strong corporate earnings results helped equity markets, especially for AI-related companies.

Let’s remember that investors went into the first quarter optimistic that a soft landing was in store for the economy, whereby a recession would be avoided, inflation would continue to improve, and the central banks would start cutting interest rates by mid-year. Fast forward to the end of quarter, and rate cut expectations have been pushed out, as economic data proves resilient.

Equity returns were far from uniform across countries. Japanese stocks rose strongly, while UK equities eked out a small gain, despite a recession announcement. Performance was similarly divergent across emerging markets; Chinese and Brazilian stocks endured losses, while India gained.

From a style perspective, growth and value stocks were virtually neck and neck. Technology and communication services sectors outperformed, while consumer discretionary stocks lagged, due in large part to weakness in the automobile industry. Small companies also struggled versus their larger counterparts, although they still delivered positive outcomes for investors.

The market's proclivity for mega-cap stocks continued, with the “Magnificent Seven” dominating performance, although this was heavily swayed by Nvidia, which rose more than 80% in the first quarter. Outside of Nvidia, Tesla was down -27% in the quarter—the worst stock in entire S&P 500. Apple was also down 11%, while Google was up 8% but trailed the broad market. Withstanding these changes, market concentration in the very largest stocks has reached a level not seen since the "nifty-fifty" era of the early 1970's.

Turning to bonds, improving news on the global economy caused yields to inch higher, providing a headwind for fixed income asset classes. Longer-duration bonds underperformed their short-duration counterparts. High-yield bonds were a standout winner among fixed income. Broadly speaking, the US dollar gained value versus most developed- and emerging-market currencies, providing a tailwind for unhedged exposures.

Portfolio review

Top 10 portfolio holdings (as of 31/03/2024)

Top Performers: Williams-Sonoma Inc, The Western Union Co, Qualcomm Inc, Garmin Ltd, Holcim Ltd

Worst Performers: Emera Inc, Fresenius Medical Care AG, Roche Holding AG Bearer Shares, BCE Inc, DHL Group

Outlook

Looking ahead, market participants are trying to reconcile a few key developments. On one hand, the market backdrop appears favourable, with sentiment improving and corporate earnings rising. On the other hand, central banks may not pursue rate cuts at the speed many hoped for, with valuations edging on expensive across many measures. Taken together, we believe a cautionary optimistic stance is warranted, balancing risk and return drivers, while selectively identifying pockets of opportunity.