LD Discretionary, the largest investment fund within The Cost-of-Living Allowance Fund, has delivered a positive return of 2.3% year-to-date in 2024. Over the last 36 months, the return stands at 7.8%. The return on the employees' holiday allowance fund stands at 2.8% as at 1 May, and since inception the return has been 9.1%. The stock markets delivered positive returns in the first quarter of 2024, whilst the start of the second quarter has been more subdued, with inflation, growth and central bank policy remaining in focus.
A good start to 2024
At the start of the year, the equity markets posted solid gains, building on the strong returns seen in the final months of 2023. Global equities, as measured by the MSCI World Index, have delivered a return of 9.4% year-to-date in Danish kroner. Danish equities, represented by the leading OMXC25 index, have returned just over 3.9% in 2024. This is driven in particular by the first quarter, as April has seen a negative return.
The US economy is generally strong, and forecasts for both growth and inflation in 2024 have therefore been revised upwards. First-quarter GDP growth came in better than expected. Normally, high growth and strong employment are positive for the stock markets, but investors’ focus is currently on interest rate cuts. The US Federal Reserve has stated on several occasions that it will not cut interest rates until inflation is fully under control and close to its 2% target. The latest US inflation figures show that it stands at 3.1 per cent. Strong growth and high employment therefore do not currently support the case for interest rate cuts. At the start of 2024, the yield on a US 10-year government bond stood at just under 4 per cent, but as the US economy has proved stronger than expected, the yield has risen to around 4.6 per cent (at the end of April), as market expectations of interest rate cuts have diminished.
Over the same period, the yield on a 10-year German government bond has risen from 2.1% to 2.6%. Growth in Europe remains low, and inflation has fallen to a level closer to the ECB’s target. Leading indicators suggest that the services sector is performing better in Europe, whilst there are signs of a slowdown in the industrial and manufacturing sectors. The European Central Bank is expected to cut interest rates in June, as several ECB members have already indicated.
Inflation and monetary policy are crucial
It is difficult for central banks to assess whether the historically rapid and substantial interest rate rises in 2022 and 2023 will have a delayed effect, causing many businesses and consumers with moderate to high levels of debt to face unnecessarily severe difficulties, and the economy will slip into recession. At present, central bank policymakers are hoping for a so-called ‘soft landing’ or ‘no-landing’, where monetary policy strikes a balance between the goal of bringing inflation down without hitting the real economy harder than necessary. There are already signs that credit conditions for businesses have tightened, and that high-yield companies are postponing refinancing due to the current high interest rates.
It is clear that the focus remains on central banks’ actions regarding interest rate cuts. Furthermore, 2024 is the year of the US presidential election and the European Parliament elections, whilst geopolitical tensions around the world persist. This is creating increased uncertainty, which is also reflected in greater volatility on the stock markets.
