Inflation Concerns Weigh on Stocks and Bonds during April

Global equity and fixed income markets experienced a challenging April, driven by concerns over persistent inflation and expectations of prolonged high interest rates, according to a report published by JPMorgan. Rising US inflation data and resilient private demand, despite weak first-quarter GDP growth, have fueled concerns that central banks may not ease monetary policy as quickly as previously anticipated. This has led to a sell-off in both stock and bond markets, with global bonds falling 2.5% and developed market equities declining 3.7% in April.

As a consequence of these changing expectations, interest rate-sensitive sectors such as small caps and REITs have been particularly hard hit, underperforming the broader market with declines of 5.1% and 6.3%, respectively. Fixed income markets have also suffered, as investors have priced out expectations for rate cuts in the US and pushed back the anticipated timing of the first cut.

Meanwhile, emerging market equities delivered positive returns of 0.5% in April, supported by higher commodity exposure and increased investor interest in low-valued Chinese equities. Commodities also performed well, with the Bloomberg Commodities Index rising 2.7% and ending the month as the top-performing major asset class. Rising energy prices and lower interest rate sensitivity further boosted the value segment of the equity market.

This trend was further evident in the performance of European equities, which outperformed US equities in April. The MSCI Europe ex-UK Index fell only 1.5%. Improved growth prospects and inflation dynamics in the region helped offset the headwinds of higher interest rates and geopolitical risks. UK equities, bolstered by their high share of energy and commodity companies, delivered positive total returns of 2.5%, making them the top-performing equity market for the month.

Taking these factors into account, JPMorgan points out the ongoing risk of persistent inflation and its potential to disrupt the rally in risk assets. The report suggests that investors should consider both recessionary/deflationary scenarios and persistent inflation scenarios when managing their portfolios. High-quality bonds and alternative investments such as infrastructure and transport are highlighted as potential hedges against these risks.

"April highlighted that persistent inflation remains a key risk and has the potential to upset the rally in risk assets," says JPMorgan. "In our opinion, it is therefore still important to consider both scenarios – recession and deflation, and persistent inflation – in the risk management of portfolios."