In Q1 2024, global equity markets rose by 8% in USD terms, continuing their strong performance from 2023.
In contrast, developed-market sovereign bonds declined just over 2% due to persistent inflation concerns, eroding much of the previous year’s gains. With continued uncertainty around the speed and timing of central banks’ interest-rate pivots, and because substantial capital has remained on the sidelines in money-market funds, a potential shift of cash into riskier assets, such as longer-duration bonds, corporate credit and equities, could be in scope over the balance of the year.
In last quarter’s edition of Markets in Focus, the report explored the changing relationship between government bonds and equities. In this quarter’s post, we focus on the relationship between corporate bonds and equities. Considering the continued bull market in stocks, MSCI examine the prevailing risks in the U.S. markets and the implications for investors choosing to move out of cash positions in 2024. This quarter also marks the start of our integrating fixed-income commentary into this quarterly analysis, to provide a comprehensive view into public markets.
Diminished diversification benefits from credit carried into Q1
Current conditions in global credit markets have been shaped by the tailwinds of high coupons, the possibility of impending rate cuts and growing confidence in a U.S. “soft-landing.” We believe vigilance is warranted, however, given the lingering effects of shocks related to the COVID-19 pandemic, the report said.
MSCI’s head of portfolio management research, Andy Sparks, discusses the relationships within the bond markets across the credit spectrum, as well as between bond and equity markets, in the four years leading up to 2024 and during the first quarter of the year.
Using the MSCI Multi-Asset Class Risk Model, its observed that correlations between corporate spreads and government bonds remain elevated, suggesting a continuation of diminished diversification benefits from debt investments. Around the world, both investment-grade and high-yield credit markets have become more closely coupled to equity markets.