October was a month marked by a series of dynamic and complex developments across global financial markets, with a mix of economic data surprises and political uncertainty creating a multifaceted narrative.
In local currency terms (i.e. unadjusted for GBP fluctuations), equities performed poorly to a greater or lesser extent, with only Japan being positive. However, over the month, GBP was weaker against most major currencies, meaning when translated back to pounds, equity returns were improved, if still lacklustre:
In GBP terms, US equities delivered strong gains as the US dollar rose in value by more than 3.5% against the pound per the chart above (green line above). Underneath the surface, the US index struggled somewhat into the end of the month as big tech earnings disappointed investors; while the absolute quantum of these earnings was, as usual, very impressive, the valuation levels ascribed to them is already very high, meaning investors expect spectacular numbers very quarter, and tend to be disappointed if this is not the case:
Elsewhere, Chinese equity market (purple line above) sentiment was extremely volatile, driven by a cocktail of regulatory concerns and mixed economic data. After a very strong September and start to October, investors grappled with uncertainty as government officials failed to provide further updates around stimulus measures. Further announcements are expected in this month (November), with officials waiting for the US election result before moving forward.
The precious metals market offered some relief, as gold and silver remained in demand (bright green and black lines above). These assets continued to attract investors seeking a hedge against geopolitical, monetary and fiscal policy risks, highlighting the ongoing appeal of real assets, not just as a store of value but also as an opportunity for enhanced returns.
The bond market, meanwhile, presented one of the more puzzling stories of the month. Despite global central banks starting their rate cutting cycles, bond yields have risen over the last month. This unexpected movement reflected broader concerns about fiscal stability, and continued doubts about central banks’ effectiveness in taming inflation The situation was particularly pronounced in the UK, where the highly anticipated budget announcement at the end of the month led to a sharp spike in gilt yields and capital losses in the bond market (dark blue line below):
The government’s new fiscal measures, which included raising the employer National Insurance rate to 15%, adjustments to Capital Gains and Inheritance Tax, and substantial spending increases, were met with scepticism. Investors worried about the government’s ability to manage economic challenges while pursuing such expansive spending policies, resulting in the Gilt yield spike above, a weaker pound and weaker domestic equities.
The Office for Budget Responsibility (OBR) offered a grim analysis of the budget. Their assessment painted a picture of lower GDP growth, reduced labour market participation and disposable incomes, and higher inflation, which, in turn, was expected to keep bond yields and interest rates elevated. The coming weeks and months will be crucial for the government to frame their policy suite in a more positive light.
Adding to the global geopolitical complexity was the heightened focus on the upcoming US election. With polls indicating a tight race, the market is braced for various potential outcomes, each carrying significant implications. Regardless of the outcome, both political camps are expected to maintain high levels of fiscal spending, which only adds to the medium-term economic uncertainty in the United States. Volatility remained elevated over the month with every headline pored over in a frenzy by investors; we shall comment on the outcome in next month’s update.
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September was a busy month for markets, driven by decisions made by major central banks, the Chinese Government announcing a major stimulus package, and a new Prime Minister in Japan.
Starting with interest rates, in September we had meetings from many major central banks, with rate changes being seen in Canada, the US and Europe, while rates were held in the UK and Japan. The Bank of Canada (BoC) and European Central Bank (ECB) both cut rates by 0.25%, having cut rates previously earlier in the year. The most significant cut came from the Federal Reserve, who cut rates for the first time since March 2020, opting for a cut of 0.5%.
The Bank of England however opted to hold rates at 5%, pausing from their first cut of 0.25% back in July. Andrew Bailey, Governor of the Bank of England, mentioned that the committee feel they have a good hold on inflation at the moment, but want to be careful not to cut too quickly, as many economists are noting that labour pressures are higher in the UK than many other developed markets.
These central bank decisions led to a strong month for Sterling, gaining against most major currencies as shown in the chart above. With most significant gains against the Canadian Dollar and US Dollar of around 2%. It was another volatile month for the Japanese Yen, which gained almost 4% against Sterling during the first half of the month, before giving back all of those gains and ending weaker against Sterling. The weakness followed the Bank of Japan’s decision not to raise rates from the still very low levels of 0.25%. There was also a spike in volatility for the Yen in the last few days of the month, following the news that the Liberal Democratic Party had elected Shigeru Ishiba as the new Prime Minister.
Moving over to bonds, we saw US and global indexes outperform, given the backdrop of falling interest rates and the Federal Reserve (Fed) deciding to start with the larger cut of 0.5%. Going into this meeting, the market was pricing around a 50/50 chance between a 0.25% and 0.5% cut. Fed Chair, Jerome Powell, highlighted that they opted for the larger cut as they were seeing some weakness is the economy, particularly in the labour market, while inflation was deemed more under control. The below chart helpfully explains their thinking around this, and where they think some key economic projections look like now, compared to the June meeting. You can see that real GDP is slightly down from the June prediction, while forecasts for unemployment were higher than they had expected. Then you have Core PCE, which is the Fed’s favoured inflation metric, which was lower than previous estimates.
This meant that, for now, the priority was on the health of the labour market, and while inflation remains more under control, they are willing to act more decisively around how and when they will be reducing rates.
We touched on this last month, and while it was understood that we will be seeing cuts from the Fed, the key remains what the long-term trajectory and how quickly rates will continue to be lowered compared to current market pricing. At the moment, both the Federal Reserve and market pricing is another 0.5% of rate cuts over the next two meetings before the end of the year, however things start to diverge when we look at where expectations of rates are throughout 2025.
Moving on to equities, we saw quite mixed performance across the major indexes that we usually reference, and all returns in the graph above are shown in local currency. This means that the strength in Sterling we discussed earlier negatively impacted returns when translated back to GBP, particularly for equities listed in the US and to a lesser extent Europe and Asia. The significant outlier here was in Chinese equities, up 23%, as the Government announced the largest package of stimulus since 2020. The measures ranged from reducing interest and mortgage rates, to encouraging local Governments to buy unsold housing, with large capital pools provided to support the equity market and direct payments to help support lower income households.
Some of these tactics have been tried before, with little success, but the key to these measures were that they were both at a much larger scale, and combined as one package rather than done one-by-one. As well as this, the market has been calling for more serious action to be taken to support the property market which has been a major drag on economic growth and consumer sentiment in China. That market has suffered from an oversupply, causing property prices to steadily decline over the last four years. In China, around 63% of household wealth is held in property, so as prices have been going lower, that has been felt very directly by residents, impacting spending, job creation and sentiment around the equity market.
Chinese equities have long suffered as a consequence of this difficult economic backdrop, and rising concerns around geopolitics. So much so that in September, China lost its spot as the largest country weighting in MSCI Emerging Markets. Therefore at a time when interest in Chinese equities was at a trough, this stimulus package caused a significant, positive shift in sentiment, with Chinese equities seeing their best week of performance since 2008. In order for this rally to be sustained, we need to see the Government act on these pledges and on future pledges that they alluded to, and see that improve consumer confidence and flow through to corporate earnings.
This boost in Chinese equities led to Asian and wider Emerging Markets outperforming other regions, gaining 7.5% and 6.4% respectively.
September was another strong month for precious metals, with silver up 8% and gold up 5%. This was less surprising given the rate cuts we saw, particularly in the US, as environments of lower interest rates are usually more supportive for those metals.
US equities performed well on the back of rate cuts, with the technology heavy NASDAQ gaining 2.6% and the wider S&P500 not far behind with a 2% gain.
It was a less positive month for UK listed equities, given the Bank of England’s decision to hold rates steady, Sterling strength and some concerns from investors around changes that may be announced in the upcoming budget. This led to losses of -0.4% for the FTSE250, and -1.7% for the FTSE100.
Japanese equities also continued their run of being a more volatile area of developed markets, losing -3.1% over September. This market had sold off during the first half of the month as investors had expected to see the Bank of Japan raise rates, but then rallied through the second half following their decision to hold rates steady. As with the Yen, we then saw significant volatility in the last couple trading days of the month, as the market digested the news of the new Prime Minister and what that might mean for fiscal spending and interest rate policy.
Looking forward to the remainder of the year, investors are still heavily focussed on global growth and employment in the US, and what that might mean for the trajectory of interest rates. For now though, growth remains resilient and unemployment remains at low levels. We also now have the added injection of stimulus from China, which should help support their economy and in turn wider global growth.
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Despite the volatile start to the month, in the round, August turned out to be a relatively positive period for global markets.
As noted in last month’s summary, the first week of August was dominated by very aggressive moves in the Japanese Yen and the wider Japanese equity market – moves that were driven by a combination of diverging factors.
On one hand, coming into August a number of disappointing US data releases pointed to slowing manufacturing output and a weaker than expected labour market, sparking concerns that the world’s largest economy might be headed towards a recession. This led to a swift change in US interest rate expectations, with investors moving to price in a series of aggressive rate cuts by the US Federal Reserve.
Concurrently, in a bid to control rising Japanese inflation, the Bank of Japan unexpectedly increased interest rates, causing a spike in the value of the Yen – per the chart below, with JPY in red – and forcing an unwind of the so called ‘carry trade’.
As outlined previously, a carry trade is very simply being ‘short’ a low yielding asset and being ‘long’ a higher yielding asset. Another way to think about it is borrowing at a low rate to invest at a higher rate elsewhere.
Unfortunately, those expectations of aggressive interest rate cuts from the US Federal Reserve, coupled with the unforeseen interest rate hike from the Band of Japan meant the differential between the low yielding Japanese Yen and the high yielding US Dollar swiftly contracted, pushing the value of the Yen higher and forcing investors to quickly sell assets to cover currency losses.
Elevated levels of selling across the major equity indices then led to falling prices, with the MSCI Japan index dropping over 20%, in local currency terms, through the first three trading days of August. The US technology index, the Nasdaq, fell over 7% in dollar terms, over the same period.
The technical nature of the correction meant the sell-off was short lived and markets soon began to pick up, buoyed by the prospect of falling interest rates and good Q2 corporate earnings. Come month end, in sterling terms, global equities had reversed all previous losses, closing up 0.2%. On a regional basis, European equities (in purple, above) also performed well, gaining 1.8%, while the FTSE 100 (in orange) added 0.1%.
At the other end of the scale, UK mid-caps (above in light blue) closed down 2.1%, while the Nasdaq (in pink) fell 1.5%, weighed on by a weakening dollar.
Across bond markets, the picture was brighter. Early month volatility saw yields fall and a flight to quality, as weakening US economic data prints and softening inflation figures paved the way for Federal Reserve interest rate cuts. US treasury prices, shown below in black, spiked initially, but later moderated versus other areas of the fixed income space to end the period up 1.3%, ahead of other developed market sovereign bonds.
Credit markets were buoyed by solid corporate earnings and falling sovereign bond yields, with corporate bonds ultimately outperforming government bonds across each of the major regions. The global high yield index was a little more subdued than its investment grade counterpart, with high yield spreads remaining a touch wider, reflecting the added risk associated with slowing growth.
Elsewhere, despite a mid-month bounce, UK government bonds, in dark blue above, closed the month with a modest gain of 0.5%. Across the UK, data prints continue to point to ongoing economic resilience, with manufacturing activity improving and inflation on a clear downward path. However, accelerating activity levels, rising public sector spending and the recently announced energy price cap increase each pose a risk to this otherwise positive inflation picture – leading to expectations that interest rate cuts by the Bank of England may be more gradual versus those of the US Federal Reserve and the European Central Bank, as the below chart indicates.
In contrast, across the US, interest rate cuts are expected to be far more expeditious, with markets currently pricing a 200bp reduction over the next 12 months, as questions over the strength of the labour market fuel recessionary concerns in the region. A weak July unemployment report showed a sharp uptick in initial jobless claims, while the month’s employment data showed a particularly low payrolls increase. However, since the release of these figures, deeper analysis indicates that the level of weakness was largely due to weather and other seasonal factors, while nowcasts indicate the August data are stabilising at slightly more healthy levels.
Despite the encouraging signs, moving into September, US jobs reports are expected to be at the forefront of investors’ minds, with further volatility likely if data disappoints. What’s more, the significance of these data points is not being overlooked by officials, with Federal Reserve Chairman Jay Powell seeking to instil confidence in the markets within his recent speech at the Jackson Hole Annual Economics Symposium, by stating that it is time for the Fed to shift its focus from fighting inflation to maintaining a strong labour market.
This rhetoric is a clear indication that the US central bank is not willing to stand by and observe a further deterioration in employment, and acts as a strong signal to markets that a September US interest rate cut is coming.
Notwithstanding the month’s shaky start, August turned out to be a positive period for balanced investors, with fixed income providing a good element of support to portfolios, particularly through the first few days of the month as equity volatility spiked upwards.
Moving forward, there are undoubtedly questions around the strength of global growth, and more specifically, the strength of US growth. However, while earnings reports remain robust, we are able to focus our attention on valuations, with a broad universe of well-priced and high-quality companies on offer across markets.
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While July’s market returns were somewhat overshadowed by the extreme market volatility that occurred towards the end of the month and into August, we saw some interesting narratives developing through the month as the global macroeconomic data picture continued to develop.
July proved to be a volatile month in the round as markets digested a number of notable economic and political developments. A weaker than expected US Consumer Price Index (CPI) reading early in the month, combined with weaker US labour market data, reassured bond investors that the Federal Reserve (Fed) will soon begin cutting interest rates. Investors now expect the first Fed rate cut in September and are currently pricing multiple US rate cuts this year.
In the US, earnings season continued with four of the ‘magnificent seven’ reporting results for the previous quarter. Broadly, investors appeared underwhelmed by the releases, resulting in the tech sector coming under pressure for most of July before a rebound into month end. With over half of S&P 500 companies having reported, more than two thirds have beaten analysts’ expectations, suggesting a resilient US economy is contributing to a broadening of earnings. Concurrently, this year’s laggards played catch up in July, with investors shifting towards small-cap equity stocks, which are more sensitive to interest rate cuts. This shift led to the largest one-month outperformance of the Russell 2000 versus the Nasdaq 100 in over 20 years.
The first chart below shows that most equities indices were negative to some degree, with the US (green line) falling by 0.4% in GBP terms. Chinese equity markets had another weak month, due to continued challenges in the real estate sector and the spillover effects on the broader economy. The MSCI China Index fell by 3.7%, however the Chinese authorities continued to implement measures to provide liquidity support to the financial system, including cutting key interest rates:
At the other end of the spectrum, UK equity markets were particularly strong through July, benefitting from strong macroeconomic data, and (to a lesser extent perhaps) a post-election honeymoon bounce. The FTSE 250 (light blue line) rose by 7.8% and the FTSE 100 (orange line) by 2.5%.
The UK saw surprisingly strong GDP data released during the month, along with various forward looking numbers that were also positive. The second chart below shows Composite PMI indices for the UK (red highlighted line) and various European regions, which are useful survey based indicators of future growth across manufacturing and services business segments. The UK has been diverging from Europe in recent months; continuing to grow while Europe is showing signs of stagnation, led particularly by Germany and France.
For now, the UK’s trajectory seems more optimistic than it has done in a number of years, with sentiment seeming to have turned amongst global investors. As UK equity markets remain cheap, we are hopeful that a shift in capital flows will continue to benefit domestic stock market returns:
In fixed income as implied above, performance was strong across the board as expectations for earlier interest rate cuts in the US were bolstered by a soft CPI print and a labour market seemingly weakening at the margin. The third chart below shows how this optimism boosted all major bond indices, with US Treasuries (black line) rising in value by 2.2% over the period.
In the UK, the stronger than expected GDP growth seen in the second quarter, combined with persistent services inflation, suggested that interest rate cuts may be more gradual compared to the US and Europe. As a result, UK Gilts (blue line) marginally underperformed, returning 1.9% over the month:
Finally, global currency markets were the epicentre of a short, sharp period of extraordinary volatility that unfolded in the final days of July and first days of August, with the ructions centred around the Bank of Japan (BoJ) and the Japanese Yen (JPY).
The BoJ decided to raise interest rates unexpectedly to 0.25% on July 31st, and couple that move with a surprisingly hawkish tone. This provoked very large upwards moves in the Japanese Yen as what is known as a ‘carry trade’ unwound.
A carry trade very simply is being ‘short’ a low yielding asset and being ‘long’ a higher yielding asset. Another way to think about it is borrowing at a low rate to invest at a higher rate elsewhere.
The Japanese Yen has traditionally been a popular source of funding for such trades as borrowing rates have been extremely low for a very long time, and the currency has been steadily depreciating, providing additional gains for those brave enough to be unhedged.
Unfortunately, this relationship is prone to sudden, painful reversals as the elastic is stretched tighter and tighter. Investors have borrowed money in JPY to then invest across a swathe of asset classes from emerging market debt through to large cap US tech stocks, with these most popular winners aggressively selling off as margin calls were made.
The fourth chart below shows various global currencies versus the pound, with JPY (orange line) strengthening to the tune of 10.4% in a matter of days – a near unprecedented move. Japanese equities also sold off very sharply, at one point falling by more than 12% in a day, and while something of a recovery has since taken place, at the time of writing the MSCI Japan index is down by some 6% since 31st July:
Our sense from our own research and from conversations across the industry is that while the volatility is painful, it is more due to the technical factors described above, and is not the start of a spiral into a serious recession. On the afternoon of 5th August for example, markets were partially calmed by stronger than expected data on US services businesses.
Nevertheless, there are undoubtedly large imbalances in financial markets today as we look at the valuations picture in equities in particular, but we don’t believe a 12% one day move in one of the world’s largest equity markets is justified by fundamentals.
Uncertainty will be high looking forward as we continue to experience volatile macroeconomic data, fractious geopolitics and the possibility of a worsening tech stock outlook, but our long-term thinking should remain resolutely in place.
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As the first chart below shows, June saw another very strong month for US growth stocks, proxied by the NASDAQ (pink line), which rose by 6.7%, while broad US stocks in green were also strong, rising by 4.2%.
Asian and emerging market equities also did well (yellow and orange lines), though this month neither were driven by China, which fell by 2% (purple line). Rather, returns were boosted by the likes of India which rose by 6.7%, and where returns continue to be extremely strong despite high valuations and an unexpected election result; South Korea which rose by 7.9%; and particularly Taiwan which rose by 11.7%. Taiwan is home to TSMC, the world’s most advanced producer of semiconductors and a very large component of both the MSCI Asia Pacific (9.3%) and MSCI Emerging Market (9.7%) indices, which had a very strong month in rising by 17.7%.
All of the above outweighed specific Chinese weakness and helped both broad indices do well.
Elsewhere, there were some disappointing numbers for the FTSE 250 (light blue line) which fell by more than 3% after a cocktail of worse than expected macroeconomic data, and for Europe which fell by 1.7% on French election worries.
Finally, precious metals had a more muted month with silver (light green line) falling by 4.2%. We feel that this was just a pause for breath after a very strong run up, and indeed so far in July Silver is up by nearly 4% in GBP terms:
Taking a look under the bonnet of global equity returns, we find that once again smaller companies underperformed their larger counterparts substantially over the month, by around 4%. Despite over the longer term smaller companies tending to outperform larger, this underperformance phenomenon has now been playing out for more than 5 years as a result of investors’ increased focus on large technology stocks, and more recently, a higher interest rate environment which tends to be worse for smaller companies.
Smaller companies now look very cheap indeed relative to large companies, and as the chart below shows, have just suffered their worst half-year performance on a relative basis in their history, with data going back to the 1970s. This is one of the many dislocations in markets today caused by excessive optimism in parts of the equity market, and one we think will close over time.
In fixed income, as the next chart below shows, June was a positive month in the round for most areas, despite some weakness into the end of the month. Only global inflation linked bonds (light blue line) were negative, falling by 0.25%.
Again we saw some large fluctuations, but this month in general government bonds outperformed corporate bonds. We saw a sharp dip at the start of the month in line with a very strong US jobs report, but those losses were then erased by gains resulting from a slightly softer than expected US inflation print which sent yields lower and prices higher. Despite a roll down into the end of the month, most indices ended high, with UK Gilts (dark blue line) the strongest performers, rising by 1.3%.
June and very early July saw a large number of elections taking place, including of course in the UK, where, as was widely predicted, the Labour Party won itself a very large majority, while the Conservatives collapsed to their worst result in history; winning 121 seats and just 23% of the vote share, and the SNP in Scotland similarly so; losing 37 seats largely to Labour.
What became very clear quite quickly was that the seat gains for Labour and the Liberal Democrats were not generated by an upswell in popular support – their vote share barely budged from 2019 – but instead were largely powered by a big turnout from Reform party voters who ate into conservative party support, allowing the other parties to swoop in.
The chart below shows every seat that was lost by the conservatives represented by arrows, with each portion of the arrow coloured and sized by each relevant party’s vote share increase, and the winning party on top. As can be seen quite clearly, most of these arrows have a large chunk of light blue in them, signifying Reform voters played a major role in the flipping of seats:
So despite the headline result, it wasn’t all plain sailing, with Labour perhaps not as popular as it might seem. We saw one of the lowest voter turnouts for 100 years, and as the chart below shows, with data going back to the 1940s, we saw by far the largest gap in recent history between vote share and seat share – Labour won 63% of seats with 34% of the vote, and further down the leaderboard, while the Reform party won 600,000 more votes than the Liberal Democrats, they won just 4 seats versus 71.
So while Labour have won the right to govern the country, they are not necessarily backed by a very high proportion of the country’s voters, meaning they have plenty of work to do to win over additional voters during the course of their term of office.
In terms of a market reaction, given the outcome was entirely in line with expectations, the price action across equities, bonds and the pound has been minimal, and from here markets will be impacted by policy implementation.
As we’ve pointed out many times before, we think the UK’s prospects look pretty good from a macroeconomic and a fundamentals point of view, with UK equities having been through a tough few years. In the lead up to the election we’ve seen decent growth momentum, with some signs that sentiment might be shifting upwards. Low valuations are a key attraction, and if the new government can deliver meaningful upside, that could turbocharge the opportunity.
As mentioned above, a large number of elections took place in June and early July, with new leadership elected in India, Mexico, South Africa and France. While we don’t have the space here to discuss each in detail, suffice to say that our main takeaway is that geopolitical volatility is here to stay, with a lot of surprising results that have resulted in very sharp market movements; both positive and negative.
One upcoming election that we will briefly touch on is the increasingly bizarre situation unfolding in the US, where the Presidential election isn’t until November, but is making headlines for all the wrong reasons.
The chart below shows the odds of various candidates to be the Democrat nominee, where following the disastrous Trump/Biden debate in June, Vice President Kamala Harris (blue line) has surged ahead of Joe Biden (white line).
For now, Biden and his team are still insisting that he’ll stay in the race, but in the background there’s a lot of horse trading around a potential replacement, and with another debate on 10th September still to come, and 4 months to go until the election itself, there will be plenty of volatility to come.
We think this domestic uncertainty adds another layer of risk to high US equity valuations which is why we’re still happy to be underweight the most expensive stocks there.
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Hopes for a so-called ‘soft-landing’ persisted through May, with cooling inflation and signs of improving growth helping to drive gains across all major equity regions, in local currency terms. However, an appreciation of sterling versus most other major currencies weighed on GBP denominated returns.
Once again, performance from commodity markets was strong, driven by rising activity levels and expectations of supply shortages in some key materials – most notably copper, where prices of the metal hit all time high levels, before dropping back as the month came to a close. Elsewhere, ongoing tensions in the Middle East led to a mid-month rally in safe-haven gold.
Across bond markets, the emerging environment of improving growth and falling inflation led to mixed outcomes, as investors struggled to comprehend the trajectory of monetary policy movements. Mid-month reports of moderating US CPI inflation created increased expectations for interest rate cuts, driving down bond yields initially, before strong labour market data pushed yields in the other direction. A month end rally in bond prices was then triggered by a US PCE inflation print that indicated a weakening in consumer spending.
At a global level, correlations between bonds and equities were noticeably high throughout May, indicative of a market that is firmly focused on movements in inflation.
On a regional basis, the US market resumed its positive streak, with the Nasdaq (in pink, above), gaining 5.0% in sterling, benefitting from a set of exceptional results from technology giant, Nvidia. Earnings reports from the chipmaker continue to impress traders, with reported quarter one profits and revenues exceeding analyst predictions. Looking more broadly, ongoing corporate strength, coupled with optimism over monetary policy easing led both the Nasdaq and the S&P 500 (in green, above) to reach record highs through the month.
Elsewhere, the broadening in returns continued, with Chinese equities (above in purple) rallying particularly strongly through the first half of the May, as market participants reacted positively to the latest round of policy driven stimulus and sought to capitalise on the region’s low valuations. Despite exuberance waning towards month end, in GBP terms Chinese equities still managed to eke out a modest 0.3% gain – in local currency terms however, this equates to a more pleasing 2.1%. Wider Asia Pacific (above in yellow) and Emerging Market (in red) equities benefitted from China’s positive performance, albeit sterling denominated returns from both regions were ultimately negative.
Japanese equities (above in dark blue) had a more difficult month as ongoing weakness in the yen weighed on investor sentiment towards the region. In GBP, the Japanese index fell 0.5%.
Closer to home, the UK’s mid cap index, the FTSE 250 (in light blue, above), had a standout month, adding 5.1% and outperforming the large cap FTSE 100 (in orange), which gained a more reserved 1.6%, having posted a new record high earlier in the month. Once again, strong performance from the UK indices is reflective of a broadening market and of investors’ renewed interest in undervalued stocks. As noted last month, this undervaluation of UK Plc. is not going unnoticed, with the pickup in M&A interest in UK companies continuing to create headlines. Through April it was mining giant BHP’s interest in Anglo American that drew the most attention, albeit Anglo have since rejected the offer. More recently, rejected bids for financial services firm Hargreaves Lansdown provided further proof of just how cheap, good quality UK companies are – a factor that bodes well for investment into the region moving forward.
Across fixed income, as noted previously, shifting interest rate expectations drove market movements through May. As the chart above shows, UK gilts (in dark blue) had a volatile month, rising over 2.5% in the early weeks before retreating to close up 0.8%. US government bonds (in black) performed slightly better, with a pullback in yields leading to a reversal of the losses seen during April.
Once again, corporate bond indices outperformed their government bond counterparts, with earnings growth and resiliency across the corporate sector providing credit with an element of protection against swings in interest rate expectations. The global credit index (in purple) added 1.8%.
While the direction of travel that certain central banks are going to take with regard to their key policy rates is becoming increasingly clear – most notably the European Central Bank (ECB) – market movements firmly indicate that for other key policy makers, things remain a lot murkier.
Within the Eurozone, growth data surprised to the upside through the May, while inflation appears to be trending downwards, allowing markets to believe, with an element of confidence, that the ECB will be the first of the major central banks to cut rates, with a cut on June 6th all but locked in by traders.
Looking towards the US and the Federal Reserve (the Fed) though, the picture is significantly less clear.
The release of April’s US CPI print showed a very small cooling in inflation, although the region’s labour market remains tight, leading the Fed to temper its rhetoric around imminent rate cuts. Furthermore, looking at PCE inflation, a broader measure that is known to be the central bank’s preferred metric, there was a slight increase in prices through April, albeit this was coupled with a weakening in consumer spending.
Looked at in combination, recent data releases do point towards a softening in the US inflation picture, however, as the chart below shows, when viewed on a year over year basis, PCE inflation is clearly beginning to stall – and it appears to be doing so at a rate that is somewhat higher than the Fed’s target 2%.
Whether this stagnating inflation picture affects what the Fed does moving forward is yet to be seen, but there is reason to think rates in the US will stay elevated for a little while longer. By way of a reminder, coming into this year, markets were pricing in 1.5% of cuts from the Federal Reserve during 2024. A far cry from the 0.5% that is currently predicted.
Finally, looking at the UK, the picture is different again. Despite falling from 3.2% to 2.3% through April, the region’s most recent inflation print came in above expectations, with the drop driven in its entirely by so called ‘base effects’. As such, with inflationary forces still at play across the UK, the scope for a June interest rate cut from the Bank of England is limited – a point that is particularly important in the context of the general election on July 6th, as the Bank will want to ensure its actions are not viewed as being in any way politically motivated.
Needless to say, as we move into the summer months, we expect volatility across markets to continue, given ongoing uncertainties around interest rates, inflation levels, and the political landscape. However, current data indicates that global growth is beginning to pick up, corporate earnings are improving and valuations in a lot of areas remain very attractive, all which provides us with plenty of room for optimism.
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Starting with bond markets, we saw negative returns for all the major bond indices across April. Largely this negative performance was driven inflation by data which came out during the month, particularly relating to the US and the UK, and which was a little higher than expected. This led investors to push back expectations relating to rate cuts made by the Federal Reserve and the Bank of England. In the US, we saw the March Consumer Price Index (CPI), a key measure of inflation, come in at 3.5%, which was higher than the 3.4% expected. This was the third higher than expected CPI report in a row for the US, and showed that inflation across the pond is remaining stickier than many had expected; particularly services related data which is being supported by a very strong labour market.
European bond markets performed better on a relative basis during April, as their inflation data came in as expected. European CPI for March was 2.4%, which was the same as the February meeting and keeps them quite close to the target level of 2%. The economic backdrop for Europe is also much weaker than we are seeing in the US, and while we are seeing improvements, the market is currently pricing in around a 70% chance that the European Central Bank cuts interest rates in June.
Closer to home, we saw CPI for the UK fall to 3.2% for March, falling from the 3.4% we saw in February and continuing a nice downward trend, as you can see from the chart below. However, the market was disappointed as, like the US, this did not fall by as much as was expected. The key issue being that services related inflation, the blue bar in the chart below, was remaining quite sticky, and that this is the hardest part of inflation for the central banks to influence.
Source: Oxford Economics
The US economic data points towards the potential of interest rates staying higher for longer. Particularly given the strong economic backdrop and the potential risk of inflation increasing at a higher rate were we to see interest rates lowered. In the UK, the weaker economic backdrop arguably means that rates could be lowered from the current level to support growth, while not causing inflation to increase. Despite the higher than expected reading for March, investors are still hopeful for a rate cut by the Bank of England coming within the next couple of meetings.
The change in expectations relating to interest rates was also one of the key drivers of the equity market during the period. April ended as the first month of negative returns for the US equity market, as measured by the S&P500, since October of last year. Given the very high weighting that US equities have in the global index, this dragged down the MSCI World, which finished down 2.9% in GBP.
The worst performing of those shown in the above graph (all returns shown in GBP) was the MSCI Japan index, which fell 3.6%, having been a very strong performing market over the past 12 or so months. However, this was largely driven by further weakness seen in the Japanese Yen, as the market was only down 0.6% in Yen terms. Given the low interest rates in Japan, the likelihood of rates staying higher for longer in markets such as the US and the UK is weighing significantly on their currency’s exchange rate. So much so that during April we saw a joint statement by US Treasury Secretary, Janet Yellen, along with her Japanese and Korean counterparts acknowledging serious concerns relating to sharp depreciation of their currencies. This lends investors to think that the Bank of Japan (BoJ) will step in to intervene with the currency, and that this is supported by the US. This has temporarily supported the Yen, but concerns remain about how much further the BoJ is willing to go to support their currency, or raise interest rates, or even whether they have the ability to do so.
As we already mentioned, US equities were weak during April, with the broader S&P500 losing 3.3%, which was marginally better than the 3.6% loss for the technology heavy NASDAQ. Unlike Japan, this was not due to currency volatility, as local returns, in USD, were weaker than those shown above in GBP. The weakness in the US market was driven by the higher for longer narrative around interest rates, which suggests that the Federal Reserve have a trickier job than other central banks. This also impacted the US more than other markets due to the higher valuation that the US market carries, particularly give the strong performance we have seen from US equities over the last 18 or so months. US earning season for Q1 2024 has also been in full flow, with the majority of the market reporting during April. This was a relatively uneventful earnings season, with the majority of companies performing in-line with expectations. It is clear to see though that the market is laser focussed on future guidance, with this being the more dominant driver of share prices following earnings announcements.
On the positive side of things, we saw Chinese equities as the best performer this month, gaining 7.6% and helping lift broader Asia Ex-Japan and Emerging Market indices. The FTSE100 also performed well, gaining 2.4%, which pushed it through the 8,000 level to hit all time highs. Patience of those invested in the UK therefore beginning to be rewarded, while valuations for the UK market still looking attractive. The FTSE was helped by strong performance in commodity related equities, particularly the miners, which have seen quite significant price increases of the underlying commodities they are associated with. This positive sentiment was given a further boost when BHP Billiton, the once UK listed miner who now trades on the Australian Stock exchange, bid for the UK listed Anglo American. The first offer was for $39bn, which was rejected by Anglo American, and investors are now weighing up whether increased bids are likely to follow, or who else might be targeted.
We discussed precious metals in detail last month, but April was another good period for both silver and gold spot prices. Both of these are also included in the chart above, with gains of 2.5% and 5.3% to gold and silver respectively. Both metals were on for a much stronger gain before they pulled back a little over the last 10 or so days of the month. This pull back was likely driven in part by the changing in rate expectations that we have already discussed.
To conclude, we feel that April has shown that we are still seeing many economies see inflation at higher levels than we thought it might be at the start of the year. This is causing volatility in expectations around interest rates, when they may be cut, and how many rate cuts we can expect in the next 12 months. This is causing ripple effects across major equity and bond markets. We therefore continue to believe this highlights the importance of diversification, particularly given the ongoing geopolitical uncertainty and all the elections that we have this year.
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Additionally, we have seen extraordinary strength within the precious metals space in recent weeks, as the prices of gold and silver have rocketed alongside associated mining equity prices, per the first chart below. Silver (light green line) rose by more than 15% during March, with gold (black line) up 11.5% also far outpacing equity markets. As could be expected, precious metals mining companies’ returns – which are a higher beta play on the precious metals space – were even stronger; over the month silver miners rose by 31.5% and gold miners by 25.0%.
Intriguingly, precious metals have been rising despite ‘normal’ conditions for a run up not being in place; the US dollar has been strengthening, while inflation adjusted government bond yields have also been rising, neither of which should be good for gold nor silver prices.
Indiscriminate global central bank purchases are the most likely cause of the recent strength, with notably China and India steadily and in large size adding to their gold reserves over the past 18 months. Many reasons have been offered as to why – perhaps central banks are worried about the US dollar’s role as an economic weapon vis a vis the treatment of Russian assets as a result of their invasion of Ukraine, or perhaps they are worried about the re-emergence of inflation.
Regardless, should the prices of the metals continue to increase, we can reasonably expect mining equities’ prices to also increase, and given this part of the market is extremely cheap with outstanding operational leverage, we see the space as a good diversifier looking ahead.
Excluding precious metals, the best performing equity region this month was the UK. The mid cap, domestically focused FTSE 250 (light blue line) and the FTSE 100 indices (orange line) both performed very strongly, rising by 4.4% and 4.0% respectively, and were driven by some of the positive macroeconomic factors we wrote about in detail last month; PMI surveys continue to show signs of strength in both the services and manufacturing sectors, GDP has returned to positive territory, the labour market remains strong, and inflation continues to surprise to the downside. Notwithstanding the political volatility we might see later this year, we still think the UK is in a good spot, and equities remain cheap.
Elsewhere, at the bottom of the performance rankings this month were Japanese equities, only rising by 0.9% over the month after taking a break from a powerful run up, and the US tech-focused Nasdaq index which rose by 1.3% during the month.
Of course this is only a 1 month time period, but as mentioned above, what we have begun to see is a wider participation in risk asset positivity, which is beneficial for those invested in other asset classes that perhaps haven’t performed as strongly over the last year, and perhaps an early warning for investors heavily concentrated in previous winners.
To illustrate this, the second chart below quite simply illustrates the notion that momentum simply cannot last indefinitely. It shows the subsequent forward returns for the 10 largest US companies over various time frames in absolute terms (black bars) and relative terms versus the S&P 500 index (blue bars), going back to 1980.
The obvious takeaway message is that while these companies do usually continue to generate positive absolute returns on a forward looking basis, their returns relative to the wider index deteriorate to a greater or lesser extent as time moves on; today’s top firms may continue to lead the market in the near term, but we think investors seeking diversification and alternative sources of alpha may find opportunities elsewhere.
Turning to fixed income, the third chart below shows bond index performance over March, where we can see what was looking like a fairly positive month sharply reversed as investors adjusted their expectations for interest rate cuts:
Best performing again were corporate bond indices which were swung around less by these changing expectations, with government bond indices drawing down much more sharply into the end of the month. The cause of this was various indicators relating to labour markets coming in hotter than expected, and some central bank economists intimating for the first time that if economic data remained hot, that perhaps interest rate cuts might not be needed at all in 2024.
For now, in the US which remains home to the world’s most important central bank, official forecasts as of March were for growth to remain strong, for inflation to fall though remain above target, but crucially for interest rates to still be cut 3 times this year. It seems that the Federal Reserve and other central banks believe policy is restrictive and rate cuts will reduce the amount of downside risk to the economy in the future. They may well be right, but it is still an open debate as to whether policy is as restrictive as they think. Financial conditions have eased significantly since the end of October, with for example the housing market, a key interest rate sensitive sector, rebounding strongly over the last couple of months.
Needless to say, markets like hearing this pro-growth bias from central banks, however, as you can see from the chart above, these same markets still have a reaction function and do not like seeing macroeconomic data surprises that imply an invalidation of their thesis.
As we look ahead into the second quarter of 2024, market conditions have become more fractious, with geopolitical tensions bubbling to the surface again in the Middle East (if indeed they had ever gone away) as Iran attacked Israel. Volatility is elevated across asset classes, which is something we expect to persist, though close attention will still need to be paid to macroeconomic data releases in the coming months given investors’ focus on them, and their importance to the continuation of the current market narrative drivers.
As we have written many times before, there remain plenty of opportunities across different asset class, but as always, diversification will remain key as we try to navigate this highly changeable market environment.
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February saw a bifurcation between equity and bond returns, with generally positive moves for global equity markets driven by strong corporate earnings reports, while fixed income came under pressure again as economic data remained resilient and expectations for interest rate cuts were pushed further out into 2024.
The first chart below shows equity market returns in pound terms during February, with outliers to the up and downside. One positive story to immediately pull out here is that of Chinese equities (dark purple line), where we saw a gain of more than 9% during the month. Having hit a five-year low coming into February, activity data over the Luna New Year holiday period showed good strength, and this, combined with more supportive interventions from the Chinese government boosted sentiment.
Given how far the Chinese index has fallen over the last year, this barely moves the dial in terms of relative returns, and valuations remain extremely cheap, but with the news getting less bad, we see this as a positive development, and we remain optimistic on the region’s prospects.
As written about last month, the Chinese government have been steadily introducing explicit and implicit stimulus and stabilisation measures, including restrictions on securities lending for short selling, easing of real estate restrictions, greater access to credit for real estate related companies, and the possibility of sovereign bond issuance to fund national projects. China’s National People’s Congress is taking place at the time of writing, and with growth targets and strategies often announced here, we can reasonably expect support to continue to flow.
Elsewhere, somewhat inevitably, we saw strong performance from US equities broadly (green line) and from the growth and technology-focused Nasdaq index (pink line) in particular, returning 6.0% and 7.0% respectively. During the month we saw quarterly earnings results from the ‘Magnificent 7’ tech stocks, which resulted in some extraordinary performance from a couple of members of this exclusive club; Meta and Nvidia.
Meta jumped by 20% on its 2nd February results day, which was the largest one day market cap gain for any stock in history, before promptly being beaten by Nvidia a couple of weeks later which itself jumped by around 16% on its own results day, adding some $277bn of market cap in one day. To put that into context, $277bn is over $20bn more than the market cap of the entire UK listed investment trusts universe of c.$250bn, and not far off the entire FTSE 250’s market cap.
These largest technology-focused companies’ share prices have been driven by the AI narrative over the past year, but despite strong earnings reports, expectations for future growth keep moving higher. Per the chart below, the largest ten stocks in the S&P 500 are trading on a multiple of roughly 30x forward earnings, with these earnings already expected by investors to expand much faster than the rest of the index. This compares to around 18x forward earnings for the remainder of the S&P 500, where earnings expectations are more modest, but still in themselves elevated in absolute terms and relative to other regions.
Meeting these earnings expectations will in part depend on whether AI lives up to current hype. While the speed of rollout and adoption of AI is impressive, its eventual impact is hard to confidently forecast at this stage:
Finally in equities, the UK performed relatively poorly during the month following a -0.3% (quarter-on-quarter) fourth quarter GDP print that showed the UK falling into a technical recession in 2023. Despite this, we think that the fundamental and macroeconomic backdrop for the UK is positive; the labour market is strong, the housing market seems to be picking back up again, consumers have got a lot of savings they can still deploy, and important leading indicators are strong, indeed stronger than most other major nations.
In fixed income, once again high yield bonds (yellow line), which of course are much more closely linked to equities than government bonds in terms of their risk return profile, outperformed, while more traditional government and investment grade corporate bonds underperformed, as we saw signs that inflation might not be completely under control continued, and central banks started to push back on rate cut narratives given continued economic strength.
Given the recent strength in economic data, we have seen a repricing of investors’ expectations with regards interest rate cuts as the chart below shows, which was the main driver of weakness particularly in the government bond space. The chart highlights the pathway for US interest rates that investors now expect (red line) vs what was expected at the end of December 2023 (blue line), with fewer and later rate cuts now priced in.
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Discover more insights from our Divisional Director, Peter Donaldson, and Investment Manager, Imogen Hambly as they delve deeper into last month’s market update.
In contrast to the broad-based rally that we saw in markets through Q4 2023, asset class returns were far more mixed during January, as investors sought to reassess their interest rate assumptions, pushing back the expected date of that all-important first rate cut.
Across developed markets, data releases continued to show economic resilience, with consumers still spending, housing markets still active, and government stimulus packages providing ongoing support to the corporate sector. Strong activity levels led inflation to surprise to the upside in December, although it remained on its downward trend. This offered sufficient evidence to support interest rate cuts through 2024, but forced traders to rethink when those cuts will begin, with central bankers eager to ensure they do not cut rates too early and reignite the fire of high inflation.
Against this relatively positive macroeconomic backdrop, equity markets returned a varied set of results, with the global equity index gaining 0.7% in sterling terms.
While developed markets were generally buoyed by the encouraging growth data, issues within the Chinese market led to losses across broad emerging market and Asian equities, despite announcements by the Chinese Communist Party (CCP) and the People’s Bank of China (PBOC) of a range of new stimulus measures.
Within fixed income, the re-adjustment in interest rate expectations weighed on returns from government and corporate bonds, with the global aggregate bond index falling 1.3%, in GBP, through the month. Other rate sensitive areas also struggled as short-term bond yields moved up. Most notably, real estate and small-cap equities both posted losses.
As tensions escalated across the Middle East, commodity markets performed well, with the Bloomberg Commodity index gaining 0.5%, in pound terms, and global oil prices rallying. Despite ongoing disruption through the Suez Canal and the consequent impact to global shipping, for now, aggregate commodity prices remain below levels seen at the start of the Israel – Gaza conflict.
As the chart above shows, at a regional level, Japanese equities (in dark blue) retained their upward momentum from 2023, outperforming other regions and gaining 7.0% in local currency terms, or 4.7% in sterling, with the strength of the pound weighing on translated returns. Across Japan, stocks are continuing to benefit from positive investor sentiment, driven by a number of factors, including low inflation, a positive growth outlook, and policy driven corporate reform.
Elsewhere, the US technology index, the Nasdaq (in pink), had another strong month, gaining 4.6% in GBP and driving the broad US S&P 500 index (in green) higher. From an earnings perspective, recent results indicate a general decline in US profit margins through Q4, however from a macroeconomic standpoint, data continues to hold up well across the region, with employment and wage growth figures pointing towards a robust labour market, while December’s GDP print came in above consensus expectations. In combination, although downside pressures are beginning to filter through, optimism around a ‘soft-landing’ scenario still appears to be supporting the region’s stock market.
Across Europe and the UK, the prospect of higher-for-longer interest rates weighed on returns. European equities (in light purple) were positive in local currency terms, but flat in pound terms, while UK equities gave back a portion of the gains we saw through the latter months of last year.
As noted previously, it was another difficult month for the Chinese market (in dark purple), with equities failing to show any kind of positive price action. The aforementioned policy announcements made by the government and the PBOC through January were designed to provide support to the economy, the real estate sector, and the stock market. However, despite their best intentions, the short-term effect of the policies was to underscore concerns about an economic recovery that is being hampered by an ongoing property crisis, deflation, and weak consumer confidence. Poor performance from China filtered through to the broad Asia ex Japan (in yellow) and Emerging Market (in red) indices, where GBP returns through the month were -4.0% and -3.7%, respectively.
In bond markets, it was a return to the trend we saw through 2023 with high yield and global credit outperforming government bonds, as traders sought to balance the ongoing strength of economies with falling inflation data, ultimately parring back their bets on Q1 interest rate cuts and leading government bond yields to rise.
As the chart above indicates, the move upwards in government bond yields hurt much of the fixed income space, notably US Treasuries (in black) and UK gilts (in dark blue), which fell -0.4% and -2.2%, respectively. The Global High Yield index (in yellow), however, rose 0.3% through the month, benefitting from the more positive macro picture, and the resulting reduction in spreads. US Credit (in pink) also outperformed, eking out a positive return of 0.1%. Again, this comes as a result of reported economic resilience across the US.
Ultimately, the month saw market participants interpret the strength of the economic data as a clear indication that rate cuts are not yet required. Consequently, it was no surprise that central banks across the US, UK and Europe held interest rates steady, with, US Federal Reserve Chair, Jay Powell, turning uncharacteristically specific in his January press conference, stating that a rate cut as early as March is unlikely.
In spite of the more hawkish tone adopted by central banks through the month, it is still generally accepted that inflation levels are falling back to target, as shown below, and while aggregate GDP growth levels are slowing, economies are not likely to enter into deep recessions – meaning rate cuts can come during 2024, and they can do so at a considered pace.
Per the above, there is little denying that the inflation picture is beginning to look relatively healthy, with both core and headline figures moving in the right direction across emerging and developed markets. January has however drawn a spotlight towards the inflationary risks that are present in within the global economy right now.
Commodity prices provided a strong disinflationary force through the latter months of 2023, with falling energy prices benefitting corporates and individuals alike.
Year to date though, escalating tensions across the Middle East and Red Sea have not only pushed up oil prices, but have added to shipping disruptions, with delays and rising costs beginning to intensify.
Encouragingly, corporates are so far managing to absorb these inflationary impulses through healthy inventory levels and well diversified energy systems. What’s more, Western economies are now benefitting from imported Chinese disinflation. As such, while activity levels in China remain depressed, it is likely that goods and commodity prices in the region are going to continue to fall and China will remain a disinflationary force, able to counteract the more inflationary geopolitical factors.
After what was an exciting end to 2023, the new year has started with a little less enthusiasm as investors have sought to digest the implications of December’s strong activity data, against a backdrop of falling inflation and mounting geopolitical risks. Despite this pick up in volatility, there remain plenty of opportunities across different asset class, but as always, diversification will remain key as we try to navigate this highly changeable market environment.
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