March 2024 market commentary

As Q1 ended and data from major economies suggested increasing overall resilience, equity markets posted solid monthly returns. The FTSE 100 found some traction amid increased hopes of interest rate cuts, finishing March up 4.85%. The Euro STOXX 50 gained 4.38% and the S&P 500 increased by 3.22%, its quarterly performance buoyed by the growth of the ‘magnificent seven’ megacap tech stocks. 

March market summary

Despite a recent uptick in US inflation and evidence that the economy is holding its own, the Federal Reserve stated that these variables wouldn’t “materially change the overall picture” of steady growth, a strong and balanced labour market, and inflation moving towards the central bank’s 2% target. Fed Chair Jerome Powell clarified that most Fed officials agreed it was “appropriate” to begin a plan of base rate cuts at some point in 2024. Powell also made it clear that interest rate decisions would not be affected by the forthcoming presidential election.

While revised GDP data from the Office for National Statistics (ONS) confirmed the UK entered a technical recession in the second half of 2023, preliminary figures from the ONS indicated that the UK likely exited its ‘mild’ recession during the first quarter of 2024. A further fall in inflation to 3.4% prompted Bank of England governor Andrew Bailey to suggest that interest rate cuts could come before the Bank’s 2% target is reached. The Bank’s Monetary Policy Committee also stated that it expected inflation to fall below its baseline target during the second quarter, aided by a reduction in the household energy price cap in April and months of slower food inflation. Falling food prices in March also sparked increased competition among retailers, boosting supermarket sales.

Eurostat data for March indicated that inflation in the eurozone fell to 2.4%, below an expected rate of 2.6%. Core inflation across the region also fell below 3%, reaching a two-year low. The fall prompted increased speculation about the European Central Bank’s rate cutting timetable, though rising oil prices have outstripped the Bank’s average cost projections for 2024, which may slow the course of disinflation in the eurozone as the year progresses.

(All returns are sourced from FactSet and are reported as total return in local currency for the period 01/03/2024 — 28/03/2024).  

EU’s flagship Nature Restoration Law under threat

Europe’s landmark bill to regenerate degraded ecosystems faced mounting pressures as farmers’ protests and growing support for the populist right caused EU lawmakers and governments to roll back on key legislative targets. Ahead of bloc-wide elections in June, some member states indicated an even more hardline approach as they look to regain conservative and rural voters opposed to centralised regulation – Finland, Sweden, Poland, Italy, the Netherlands and Hungary planned to vote against the bill, while Austria and Belgium elected to abstain.

The Nature Restoration Law was first proposed in 2022 when the European Environment Agency reported that over 80% of the region’s natural habitats were in decline. The legislative mandate that followed sought to restore 20% of the EU’s land and sea habitats by 2030 and all damaged habitats by 2050. It also included a commitment to plant 3 billion trees and remove freshwater barriers across 25,000 kilometres of Europe’s river systems. Despite agricultural concessions and a raft of last-minute objections, these headline targets still stand, and the reticence of some member states appears to stem more from domestic politics and economics than the overarching aims of the Law. Finland and Hungary raised fears of disproportionate implementation costs, Sweden objected to the idea of an EU regulatory hand in domestic forestry management, and Poland’s stance reflected a month of violent protests against EU climate policies and food imports.

The Law is pivotal to the EU’s Green deal and advocates continue to press the point that nature restoration isn’t a marginal issue. That point was reinforced by the March publication of the first European Climate Risk Assessment which concluded that the region was unprepared for the threats facing its ecosystems, economies, and public infrastructure.

The Nature Restoration Law was first proposed in 2022 when the European Environment Agency reported that over 80% of the region’s natural habitats were in decline.

BSI launches consultation on overarching principles standard for UK nature markets

The UK National Standards Body, (British Standards Institution — BSI), announced a consultation on ‘BSI flex 701’, a framework of overarching principles to bring clarity, consistency, and integrity to UK nature markets through a standardised approach to investments. Aimed at a wide range of market participants involved in the creation and trading of nature units, the BSI’s framework looks to help nature markets deliver positive environmental, economic and social outcomes, limit the risk of activity leading to unintended consequences, and support the provision of information from nature markets that detects and deters greenwashing.

The framework is the first of a suite of carbon- and biodiversity-related investment standards the BSI is developing with government backing and funding. It’s hoped that strong and consistent policy frameworks will boost investor confidence in relatively new and complex markets and help accelerate the mobilisation of private finance to support the UK’s biodiversity and net zero ambitions.

This came as the Department for Environment, Food and Rural Affairs (Defra) announced a progress update a year after the publication of its Nature Markets Framework. Key actions included working with HM Treasury and HM Revenue and Customs to clarify nature market taxation, launching Projects for Nature to connect businesses and donors supporting nature recovery projects, launching the mandatory Biodiversity Net Gain ruling for developers to improve habitat outcomes, and investing over £100 million to combat nutrient pollution and facilitate the delivery of thousands of new homes in affected catchments.

EU finally finds unity on Corporate Sustainability Due Diligence Directive

After abstention threats by member states, a failed implementation vote in February, and a host of changes to the provisional text, the Council of the European Union finally voted through an agreed text for the Corporate Sustainability Due Diligence Directive (CS3D) on 15 March. The Directive requires companies active in the EU to prevent human rights abuses and negative environmental impacts throughout their operations and value chains. It will still need to pass a final vote in the European Parliament (scheduled for the end of April) before it is formally approved.

Persistent lobbying by some member states, however, has resulted in a significant reduction in the Directive’s scope. It was initially agreed in December 2023 that companies with a net turnover above €150 million would be covered by the Directive. In February, the threshold increased to €300 million, and the March agreement extended it further to €450 million, reducing the number of affected companies to just under 5,500.

While critics suggest the Directive has been compromised to appease ‘swing states’, it nevertheless represents an important piece of legislation supporting corporate sustainability, especially across supply chains where reliable intelligence is often limited. Support for the adoption of the Directive has also benefitted from the EU’s recent preliminary endorsement of the separate but closely related Forced Labour Regulation (FLR) – member states approving the FLR are finding it harder to justify holding out against the Directive. 

The Directive requires companies active in the EU to prevent human rights abuses and negative environmental impacts throughout their operations and value chains.