Commentary for September 2024

Market Overview

Global equity markets closed broadly unchanged in September while bonds finished 1% higher. The month began with a sharp pullback, as fears of a sharper slowdown in the US economy were triggered by a series of weaker data. However, a bumper interest rate cut by the Federal Reserve and economic stimulus from China fuelled a sharp turnaround, lifting equity markets back to unchanged by month end. In regional terms, the US closed flat, while Europe, the UK and Japan all saw profit-taking, closing 2% lower. Asia and emerging markets were the standout regions, rising by 3% and 5%, respectively. In sector terms, it remained a much more balanced market, favouring cyclicals and financials overall as the monetary easing cycle continued to gather pace. Tech also moved up but is not enjoying the ‘Magnificent 7’ dominance that it once did. For the first time AI superstar Nvidia delivered stellar earnings and was not rewarded by investors. The stock fell 6% on the day, a signal that growth expectations may now be priced in.

China was a standout performer. In what amounts to a massive adrenaline shot for the world’s second biggest economy, the central bank unveiled its largest stimulus package since the pandemic, with a series of monetary stimulus measures designed to boost the economy and the country’s embattled property market. The move sent China’s shares soaring to close the month 21% higher.

Gold continued to outperform both equities and bonds, closing for the first time ever above £20 per ounce. Central banks, particularly in emerging markets, continue to buy at an unprecedented rate as they accelerate their efforts towards de-dollarisation. The gold mining companies were particularly strong, buoyed also by news of a bid for Centamin Plc by Anglo Gold Ashanti at a 36.7% premium. The prices of oil and industrial metals also rose, as tensions in the Middle East continued to escalate and renewed confidence in a Chinese economic turnaround fuelled expectations of stronger demand.

September also saw 26 global rate cuts; this was the 4th largest month of monetary stimulus this century. The US Federal Reserve kicked off its long-awaited easing campaign with a bumper 0.5% cut. The policy change was seen as pre-emptive. In a statement accompanying the rate decision, Fed Chair Jay Powell said, “the US economy is in a good place and our decision today is designed to keep it there”.

The ECB also cut rates by a further 0.25%. The euro area’s private-sector economy shrank for the first time since March, with the end of France’s Olympic boost and a deepening manufacturing downturn heightening concerns that the recovery has run out of steam.

The UK economy grew by 0.2% in August, after flatlining in June and July. The Bank of England chose to keep policy on hold in its September meeting, having cut rates to 5% for the first time in over four years at the start of August. However, Governor Andrew Bailey stated that policymakers could become a “bit more aggressive” in their approach if inflation continues to cool. Recent news has been positive in this regard, with the CPI rising by just 1.7% in September, the lowest reading in over three years and comfortably inside official policy targets. Regular wages growth also decelerated further to 4.9% on an annual basis in August. As a result, markets are currently expecting a further two rate cuts of 0.25% each during the final two months of the year, bringing the base rate to 4.5%.

The UK equity market continued to tread water, as investors remain cautious ahead of potential measures in the Autumn Budget on October 30. The Labour government’s efforts to prepare the public for tough new tax hikes have backfired on sentiment in the short term, with the latest consumer confidence reading showed a sharp fall, while business chiefs are the most pessimistic they have been about the economy since late 2022, when the UK was still reeling from the fallout of Liz’s Truss’s disastrous mini Budget. Investors pulled almost £670m from UK equity funds in September. Gilt yields also edged higher, driven by concerns over plans to change government borrowing rules to facilitate more investment in the UK economy by changing the way debt is defined.

Looking Forward

Central Banks around the world have now embarked on the start of a new rate cutting cycle, with consensus expectations calling for interest rates to reach 3% by the end of next year across major Western economies in the US and Europe, with the UK slightly higher.

The global economy and labour market are clearly cooling, and the downside risks to growth have increased, but weakening data remains consistent with a soft landing at present. The US Fed’s emphatic policy move and willingness to act further has helped reassure investors that the downside risk is likely to be limited, particularly as there remains plenty of scope to ease policy from current levels. Historically such periods of global easing have ultimately led to stronger economic growth and rising corporate profits. Hence the outlook for equities over the medium term remains constructive.

Valuations in the US are starting to look stretched, with tech perceived to be the biggest culprit. The US equity market is also looking overbought in the short term. It would therefore not be surprising to see a pull-back before we enter what is usually a period of seasonal strength into the year-end. We have raised a small amount of cash across standard portfolios in order to capitalise on any buying opportunity this would present. Over the medium term, the prospects across other areas of the globe are looking increasingly attractive, as relative values compared to the US have rarely been so compelling.

Our Strategy

On a global basis our standard portfolios are overweight the UK, Japan, Asia and emerging equity markets.

UK equities remain a high conviction call. Economic data has surprised to the upside, inflation has been subdued and a stream of bids for cheap companies has continued to highlight the value in stocks. Speculation over the potential for tax increases in the forthcoming budget has acted as a ceiling on market returns over the summer months and may create a potential buying opportunity in the short term.

The US monetary policy outlook is likely to be most supportive for emerging markets, where equities are benefiting from stronger domestic demand and growth. The region has delivered positive performance after the end of a US rate hike cycle in four of the past five cycles. Action by the US Fed also provides greater flexibility for this region to initiate its own policy easing cycle without the fear of negative repercussions for its currencies.

Chinese stocks are set to receive a significant policy boost. The authorities are throwing the kitchen sink at the economy, which is exactly what markets needed. Many commentators are suggesting that this may be China’s whatever it takes moment – a reference to Mario Draghi’s famous declaration in 2012 during the euro crisis. Whether or not these measures will translate into consumption and overall growth and fix the deeper structural issues within the economy remains to be seen, but it’s hard to be bearish when both of the world’s biggest economies are loosening monetary and fiscal policy simultaneously. A stronger China would further increase the attraction of emerging markets and commodities in general and help unlock some of the value that’s been accumulating over the past decade or so.

While equities remain our preferred asset class, the prospect of lower rates means that bonds should outperform cash. Bonds also provide diversification in the case of slower growth but will not protect portfolios from the possibility that inflation remains higher for longer (except for index-linked bonds). We are also mindful that the high level of fiscal deficits and outstanding public sector debt across major Western economies may well maintain upward pressure on yields for the foreseeable future.

Alternative assets such as gold and commodity stocks offer an additional source of diversification and allow us to hedge against inflation and other potential risks and capitalise on wider opportunities outside of traditional bonds and equities. The combination of higher geopolitical risk, lower interest rates, a weaker dollar and strong central bank demand has created a highly favourable environment for gold. Our exposure to both physical bullion and gold mining shares across standard portfolios has been a major contributor to outperformance versus benchmarks.

Overall, we continue to manage investments in a manner that allows us to capture the upside in financial markets while also effectively controlling risk to dampen volatility and smooth the path of returns.