Following more than a year of Artificial Intelligence (AI) leading the market, the summer of 2024 proved favourable for diversified investors. Whilst third-quarter returns may appear modest, they conceal significant market shifts and volatility, with returns expanding beyond the U.S. technology sector and across broader global equity markets.
In a surprising twist, the U.S. equity market ended up as the worst-performing market in the third quarter (in sterling terms), falling -0.55%, with the U.S. technology market falling -4.91% (having recovered from falling -10.80% between 1st July and 5th August). Known for its resilience and dominance over the last 18 months, the U.S. market encountered unexpected challenges. In our June commentary, we cautioned about the eye-watering stock valuations in the U.S., urging investors to question whether they were truly justified. The U.S. Q2 earnings season brought these concerns to the forefront, prompting investors to reassess. By mid-July, doubts emerged over whether the heavy investment in artificial intelligence would yield proportional returns, leading to a significant rotation of capital away from large technology companies (The Magnificent 7). Of the 109 negatively returning stocks over the quarter in the U.S. market, Nvidia, Amazon, Microsoft and Google were included. This rotation favoured the lower-valued U.S. smaller companies’ sectors, which outperformed the U.S. large cap market over the quarter. Recessionary fears within the U.S. economy added further downside pressure to global equity markets in early August, as softer-than-expected labour market data and slowing economic growth was an unfavourable narrative.
Coinciding with this, the Bank of Japan’s decision to increase its interest rate from 0.00% to 0.25% and the hawkish tone led to an abrupt unwinding of carry trade positions, (which had relied on cheap Japanese yen borrowing costs to buy other higher yielding assets). This caused a violent spike in volatility across global markets. The Japanese market was the hardest hit dropping -12% in a single day on the 5th August, its biggest daily drop since Black Monday in 1987, whilst the U.S. technology market dropped almost 6% over the course of three days. The equity market sell-off was however short-lived. After the initial spike in volatility, investors took comfort in the prospect of lower interest rates, allowing most markets to recover most of the losses by late August. This month also saw the long-awaited cuts in interest rates from the Bank of England, which reduced rates by 0.25%, followed closely in September by the U.S. federal reserve which surprised many by announcing a cut by 0.5%.
Pleasingly for the diversified investor, the start of the long-awaited interest rate cutting cycle led to strong, positive returns from the ‘interest rate sensitive’ asset classes that have tested the patience of investors over the last two years. Global Bonds (+2.90%), U.K. Gilts (+2.80%) and U.K. property REITs (+6.50%) broadly outperformed developed markets over the quarter, a pleasing sight, particularly for the more cautious investor who would typically have a higher allocation to these asset classes.
The U.K. market was a strong performer over the quarter. A landslide Labour general election win at the start of July helped fuel hopes for a sustained recovery in the domestic economy whilst removing political uncertainty. Inflation has held steady at near 2%, leading to strong performance from the U.K. mid cap market, which rose 5% over the quarter, outperforming the U.K. large cap market, which rose by 1.79% despite the headwinds of a strong currency impacting the sterling value of its heavily biased overseas earnings. Sterling rose 6% against the dollar over the three months, to its highest level since Q1 2022. The trend of mergers and acquisitions in the U.K. continued, highlighted by Informa’s £1.2 billion deal to acquire Ascential in late July. Rightmove, the U.K.’s online real estate leader, received four unsuccessful bids from Australian property group REA, while retail giant Frasers Group also made an unsuccessful bid for luxury brand Mulberry. We expect this M&A activity to persist into Q4.
Emerging markets had a rather uneventful quarter up until the final week of September, when after more than 2 years of disappointing growth from the Chinese economy post covid, the final week of September saw Chinese equities have their best week since 2008 following Beijing launching a long-awaited and large economic stimulus package. The rally, which also helped buoy European markets and luxury retail sectors, comes as China’s leadership rushed to support the country’s capital markets. On the 23rd September, the Chinese market was on track to be the worst-performing market over the quarter, however, within seven days, it had rallied more than 20%, making it the strongest performer over this period.
As we move into the final quarter of 2024, we expect to see the volatility continue. Market volatility, whilst always unsettling, is a regular market occurrence. It often presents the opportunity to add to fundamentally sound stocks at ‘sale’ prices. The fourth quarter brings some key issues for investors to contemplate including a U.K. budget, a U.S. Presidential election, continuing conflict in the Middle East and further interest rate and inflation narratives. However, there are still areas of value across equity and fixed-income markets. At BRI, Portfolios will continue to remain diversified, and we will take advantage of investment opportunities as they arise.
Tom Hopkins MSCI
Senior Portfolio Manager
Market Commentary October 2024
/
/
/
Following more than a year of Artificial Intelligence (AI) leading the market, the summer of 2024 proved favourable for diversified investors. Whilst third-quarter returns may appear modest, they conceal significant market shifts and volatility, with returns expanding beyond the U.S. technology sector and across broader global equity markets.
In a surprising twist, the U.S. equity market ended up as the worst-performing market in the third quarter (in sterling terms), falling -0.55%, with the U.S. technology market falling -4.91% (having recovered from falling -10.80% between 1st July and 5th August). Known for its resilience and dominance over the last 18 months, the U.S. market encountered unexpected challenges. In our June commentary, we cautioned about the eye-watering stock valuations in the U.S., urging investors to question whether they were truly justified. The U.S. Q2 earnings season brought these concerns to the forefront, prompting investors to reassess. By mid-July, doubts emerged over whether the heavy investment in artificial intelligence would yield proportional returns, leading to a significant rotation of capital away from large technology companies (The Magnificent 7). Of the 109 negatively returning stocks over the quarter in the U.S. market, Nvidia, Amazon, Microsoft and Google were included. This rotation favoured the lower-valued U.S. smaller companies’ sectors, which outperformed the U.S. large cap market over the quarter. Recessionary fears within the U.S. economy added further downside pressure to global equity markets in early August, as softer-than-expected labour market data and slowing economic growth was an unfavourable narrative.
Coinciding with this, the Bank of Japan’s decision to increase its interest rate from 0.00% to 0.25% and the hawkish tone led to an abrupt unwinding of carry trade positions, (which had relied on cheap Japanese yen borrowing costs to buy other higher yielding assets). This caused a violent spike in volatility across global markets. The Japanese market was the hardest hit dropping -12% in a single day on the 5th August, its biggest daily drop since Black Monday in 1987, whilst the U.S. technology market dropped almost 6% over the course of three days. The equity market sell-off was however short-lived. After the initial spike in volatility, investors took comfort in the prospect of lower interest rates, allowing most markets to recover most of the losses by late August. This month also saw the long-awaited cuts in interest rates from the Bank of England, which reduced rates by 0.25%, followed closely in September by the U.S. federal reserve which surprised many by announcing a cut by 0.5%.
Pleasingly for the diversified investor, the start of the long-awaited interest rate cutting cycle led to strong, positive returns from the ‘interest rate sensitive’ asset classes that have tested the patience of investors over the last two years. Global Bonds (+2.90%), U.K. Gilts (+2.80%) and U.K. property REITs (+6.50%) broadly outperformed developed markets over the quarter, a pleasing sight, particularly for the more cautious investor who would typically have a higher allocation to these asset classes.
The U.K. market was a strong performer over the quarter. A landslide Labour general election win at the start of July helped fuel hopes for a sustained recovery in the domestic economy whilst removing political uncertainty. Inflation has held steady at near 2%, leading to strong performance from the U.K. mid cap market, which rose 5% over the quarter, outperforming the U.K. large cap market, which rose by 1.79% despite the headwinds of a strong currency impacting the sterling value of its heavily biased overseas earnings. Sterling rose 6% against the dollar over the three months, to its highest level since Q1 2022. The trend of mergers and acquisitions in the U.K. continued, highlighted by Informa’s £1.2 billion deal to acquire Ascential in late July. Rightmove, the U.K.’s online real estate leader, received four unsuccessful bids from Australian property group REA, while retail giant Frasers Group also made an unsuccessful bid for luxury brand Mulberry. We expect this M&A activity to persist into Q4.
Emerging markets had a rather uneventful quarter up until the final week of September, when after more than 2 years of disappointing growth from the Chinese economy post covid, the final week of September saw Chinese equities have their best week since 2008 following Beijing launching a long-awaited and large economic stimulus package. The rally, which also helped buoy European markets and luxury retail sectors, comes as China’s leadership rushed to support the country’s capital markets. On the 23rd September, the Chinese market was on track to be the worst-performing market over the quarter, however, within seven days, it had rallied more than 20%, making it the strongest performer over this period.
As we move into the final quarter of 2024, we expect to see the volatility continue. Market volatility, whilst always unsettling, is a regular market occurrence. It often presents the opportunity to add to fundamentally sound stocks at ‘sale’ prices. The fourth quarter brings some key issues for investors to contemplate including a U.K. budget, a U.S. Presidential election, continuing conflict in the Middle East and further interest rate and inflation narratives. However, there are still areas of value across equity and fixed-income markets. At BRI, Portfolios will continue to remain diversified, and we will take advantage of investment opportunities as they arise.
Tom Hopkins MSCI
Senior Portfolio Manager
Contact Us
For more information contact us