April market review: How equities bounced back while bonds floundered

After a chaotic March, April allowed investors to take a step back and process the situation in front of them. What markets saw, by and large, was a return to the norms of earlier this year.  

The US made a strong recovery, as the Morningstar US Market index rose 7.2% during the month, while the Morningstar UK Index climbed up 2.4%. The indices are now up 4.2% and 5.3% year to date, respectively. Onlookers may find this confusing in some ways: How is it, that with the exact same pressure on oil prices that caused a mini market meltdown in March, have investors decided it’s business as usual in April?  

While this may seem counter intuitive, it’s actually a pattern we’ve seen many times before. For most people, investing is a long-term journey. But when an event hits the headlines that could have implications for the market, investors suddenly start to examine the short term. This causes some roil in the market, like we saw with quickly shifting rate expectations. Ultimately, as the situation becomes a more normal part of the news cycle, people start to look at a longer time horizon once again. If the effects seem temporary, investors are usually willing to wade back into the market.  

April’s standout market

One of the market areas that's garnered the most attention in the last month is emerging markets excluding China, which has continued to soar ahead. The Morningstar Emerging Markets ex-China index is now up 19.9% year to date. South Korean tech giant SK Hynix reported record high quarterly figures on 22 April, including a quarterly revenue that reached above 50 trillion won for the first time.  

Calling emerging markets excluding China the ‘April Standout’ is perhaps an understatement, as the sector has now outperformed the US, UK and global markets on a three-year basis. 

The tech presence in these regions has been able to benefit from the same AI boost that US companies enjoyed in the past few years. But interestingly, these emerging markets haven’t seen the same wane in interest that the US has experienced. Currently, the company earnings seem enough to keep investor interest piqued.  

Emerging markets have been a big beneficiary of the AI trend because there are some very large companies that dominate the indices. This is a phenomenon that’s often discussed in the context of the US and the Magnificent Seven, but it is actually more severe here. TSMC alone makes up 17.3% of the Morningstar emerging markets excluding China index, followed by Samsung at 7% and SK Hynix at 3.7%. In comparison, Morningstar’s US Market index has its highest weighting in Nvidia, at 6.7%.

No rebound for bonds

While stock markets have healed in April, some bonds remain bruised. The Bloomberg Sterling Gilt index is down 2.6% year to date, and in the depths of uncertainty in March, it dipped more than 4%. This causes some concern. Government bonds are designed to be a stable part of investor’s portfolio but in this scenario, they have reacted just as severely as equities.  

Government bonds were uniquely exposed to this conflict, as the rise in energy prices translates to inflation and interest rates, which feed into bond prices. But it’s not the first time we’ve seen government bonds react slightly erratically to market movements, especially following Covid-19.

And while equity markets have bounced back from these events, government bond investments have stayed quite depressed, meaning investors are losing out on both stability and returns. For the markets, it seems that the government bond yields on offer right now are not enough to counter the risk of price drops the sector has been facing in recent years.  

There is still opportunity in the bond market, but it may take a bit more creativity than focusing on standard 10-year gilts and treasuries. One area where we’ve seen increasing potential is inflation-linked bonds, where the returns from the bond move in line with inflation. This means investors won’t be left behind with a bond paying an interest rate that doesn’t keep up with inflation, which has risen beyond expectations in recent years. In addition, shorter dated bonds which don’t face the same degree of inflation risk are offering a smoother ride. Finally, with headwinds facing some bond markets, being diversified has been helpful; this means that in addition to government bonds we also hold corporate bonds and bonds in Emerging markets.