The past three months (5 July 2024 to 5 October 2024) have been a wild rollercoaster ride for financial markets as they have been up, down and all around.
Although most markets ended the period close to where they started, frustratingly the strength of the British pound due to hawkish policymaker comments at the Bank of England, either dampened, or in some cases, turned the returns negative. For example, the US S&P 500 index, which had been down nearly 7% at one point during the period, end the period up 3.3%, but as a UK investor this return is reduced to just 0.8%, while the -1.7% return on the technology-heavy Nasdaq 100 index is turned into a 4.1% loss. In Europe, the Euro Stoxx 50, which at one point was down 8.2%, ended the period down just 0.5%, translating to a negative 1.7% return.
In the UK, the FTSE 100 rose 0.93% over the valuation period, thanks to an economy that continues to perform reasonably well, and far better than some of its G7 peer group despite the constant downbeat commentary from our new government.
The UK’s relatively good economic position is similar to a situation where something initially grabs your attention but quickly becomes unnoticed. In this case, the unnoticed aspects are the UK’s economic growth, low inflation, and the prospect of aggressive interest rate cuts, as the focus shifts to the negative sentiment emanating from numbers 10 and 11 Downing Street.
In fact, the UK economy grew by 0.7% in the first quarter of 2024 and 0.5% in the second – and among G7 countries only the US and Canada have outpaced the UK. Germany, Europe’s largest economy has stuttered along at 0.2% and -0.1% during the first and second quarters respectively – and consequently hasn’t grown at all over the last year. Although Germany’s economy compares favourably to, say, Japan whose economy has contracted by 0.9%, it doesn’t against the UK’s economy which is now 0.7% bigger than it was 12 months ago.
While we appreciate it is hard to escape the media’s amplified focus on political news (not just in the UK with the upcoming Autumn Budget this month, but also from France, Germany, and the US, with the November presidential election approaching, to name a few), its impact on financial markets hasn’t been significant as the focus has been squarely on central banks and their monetary policy during the valuation period.
Although the major central banks (the US Fed, the European Central Bank and the Bank of England) initially set themselves a high bar to start cutting interest rates, now they have all finally crossed that rubicon, the bar for subsequent cuts is lower. This is especially true in the US as recent unemployment data suggests that the US employment market is showing signs of slowing (the US central bank, the Fed has a dual mandate and is expected to aim for full employment as well as low inflation).
Even though US unemployment has risen to 4.1%, it’s still coming off historically low levels, and more importantly, companies continue to hire.
As such the Fed’s recent 0.5% interest rate cut coupled with policymakers stating that they will continue to support the economy, could, we believe, mean the US economy is capable of growing at close to 3% this year – and this resilience underpins our goldilocks, soft-landing outlook for their economy, which we believe is a clear positive for global financial markets.
However, the risk of an escalation in the Middle East shouldn’t be ignored, as this could hamper both economic and investor sentiment. Financial markets, particularly the oil market, have largely overlooked these tensions, with Brent crude prices falling from over $90 in April to below $70 a couple of weeks ago due to stable oil supply. Lower oil prices not only reduce inflation, making it easier for central banks to cut interest rates, but they also benefit consumers, as oil affects nearly all goods and services, not just fuel prices.
Unfortunately, the more recent escalation in tensions between Iran and Israel has raised concerns about potential disruptions to oil supplies. This uncertainty contributed to a $10 increase in oil prices as the valuation period drew to a close.
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Income Element
With central banks beginning to lower interest rates, corporate bond yields may have peaked. As bond yields fall, prices (which move inversely to the yield) will rise – and with inflation effectively back, or very close, to 2%, our strategy of holding a diversified spread of secure companies with investment-grade credit ratings and stable income until their maturity continues to look sensible.
Long-Term Growth Element
Overall, economic data released during the valuation period underlined the global economy’s resilience. With central banks now actively lowering interest rates as inflation continues to slow, a soft landing appears increasingly likely. In other words, we aren’t heading towards a severe recession, but rather an economic slowdown, which suggests to us that global equity markets have the potential to continue rising.
While we maintain our positive outlook for Asian and Emerging Market equities, we reduced the portfolio’s exposure to China as the country’s property market weakness and low consumer sentiment hint at a protracted period of sluggish economic growth.
We reallocated this cash to the portfolio’s European exposure. Despite recent weak economic data, the decline in inflation to below the European Central Bank’s 2% target suggests to us that policymakers will aggressively cut interest rates in the months ahead to support the economy.
For clients with Ethical portfolios, shares in socially responsible companies have started to perform better as inflation and interest rates become more supportive.
The Investment Management Team
