Investment Update: July 2024

INVESTMENT UPDATE JULY

*All return in local currency terms

Overview

The news flow in June was dominated by politics, as elections and their potential outcomes took centre stage. In India, President Modi lost his overall majority, in the UK prospects of a labour government seemed likely and in the US, the first TV debate between Biden and Trump proved challenging for the Democrats. However, it was only the snap election called in France by President Macron that had any significant effect on markets, as the prospect of either the extreme left or right leaning parties obtaining power rattled European bonds and French equities. This also has the potential to have the most significant impact in the future, as the outcome could create a seismic shift within the EU itself. Meanwhile, in the US, technology stocks continued to drive the market forward, with Nvidia once again leading the way. Needless to say, this all led to the performance of equity markets being mixed across regions. However, despite the political backdrop, bond markets continued their upward trend, as optimism returned about the inflationary outlook and we saw interest rate cuts in Europe and elsewhere.

US

The US Presidential election campaign kicked off earlier than is customary with a TV debate gauntlet laid down by President Biden to his main contender, Donald Trump. The performance differences were marked and assuming voter reactions are carried forward to the ballot box we can anticipate President Trump’s return in January 2025. There is, however, speculation that Biden could be replaced as Democrat leader during the August convention. Both contenders plan to spend around $6 trillion, albeit in different ways but the deficit implications are not radically different. As previously mentioned, the main market pushed ahead, but in a narrow range of stocks, with mid and small cap indices down over the month. Valuations for the S&P 500 are high and progress is dominated by larger firms with the stock market darling Nvidia market capitalisation valued higher than all UK stocks combined. A slip in earnings progress could bring prices lower.

The main economic drivers persist in good shape with Personal Consumption Expenditure (PCE) inflation falling in line with expectation, close now to the Federal Reserve’s 2% target, although wage inflation continues to be an issue. The market anticipates two interest rate cuts this year, which may well be reduced to a single cut if the economy remains strong. There has some early weakness in the labour market and we continue to monitor developments. Should weakness develop here, the likely reaction of the Federal Reserve would be to cut rates more quickly, although Treasury yields of around 4.3% for the 10-year bond suggest nothing radical. Likewise, the business cycle in America, denoted by the Institute of Supply Management study is enjoying an expansion.

Europe

As expected, the European Central Bank (ECB) cut interest rates and ahead of the US for a change. The continued dichotomy between economies, particularly with continue weakness in Germany, lends support to this move, but Christine Lagarde, made it clear that any future cuts would be dependent on any data on the inflation front. However, the positive move on interest rates was overshadowed by a poor performance from President Macron’s Ensemble party in the European Parliamentary elections, with Marine Le Pen’s right leaning RN party making positive gains. The resulting snap election for the French parliament called by Macron has proved a disastrous decision and the country now faces the potential for at best a hung parliament and at worst a Euro sceptic right wing majority. The latter scenario having the potential to create issues for the EU as a whole. At one point the French CAC index was down 6% and bond yields rose to near that of Italy’s.

UK

At home, markets were sanguine about the prospect of a labour Government, which at the time of writing has proven to be the result. Sir Keir Starmer has moved his party to a more centrist position and has made it clear that he intends to be fiscally responsible. The ten-year gilt yield, indicative of the medium term interest rate the government can borrow money at, fell during the month -indicating markets were not expecting any negative surprises on the fiscal front, which is reassuring. Market attention was more focussed on the anaemic GDP growth rate, which although revised up is still below 1%, as well as the latest inflation picture. Whilst headline inflation now appears to be in line with the Bank of England’s target, wages in the service sector are still rising at a rate of over 5%. This led the bank’s monetary policy committee to keep any rate cuts on hold and it is the incoming government that will feel the benefit of any future rate cuts.

Japan

Japanese equities had a strong month, however this came at the expense of a continued decline in the value of the yen, as the currency tested the lows against the US dollar seen in May, which caused a $60bn intervention from the Bank of Japan. While there was no evidence of further intervention in June, the Ministry of Finance appointed a new currency czar, replacing the incumbent vice finance minister for foreign affairs. While a weaker yen increases the competitiveness of Japan’s exporters, it does create inflationary pressures which, while previously welcomed after decades of deflation, does create issues for the economy. The currency’s problem is that investors can benefit from the ‘carry’ trade between the dollar and the yen (trading the large differential between the respective countries’ interest rates), so until US rates fall and Japan’s rise, it makes it difficult for intervention to succeed.

Asia and Emerging Markets

Once again, a mixed picture emerged in Asia, as issues over the property market bubble return to dominate investors thinking. The initial positive effect of government policies that were announced to address the property market have clearly worn off, as worries persist about the level of financial support proposed being sufficient to fix the debt overhang. The consequent devaluation of the yuan continues to benefit exporters, but unlike Japan, there is resistance to Chinese exporters benefitting their improved competitiveness, as the US and Europe continue to impose tariffs on Chinese goods. Elsewhere, we saw the Taiwanese and Korean markets follow the US lead, with information technology stocks driving the markets there higher. The stock market in India, having fallen significantly immediately following the shock election result there, recovered strongly through June to make India one of the better performers over the month as a whole.

Outlook

Portfolios have enjoyed a positive half year with US equities the driving force behind growth. The most recent changes made in the managed portfolios during May have proved beneficial, with higher US weightings, overweight Japan with Europe and UK assisting. Lower weightings in China and Asia Pacific (ex-Japan) and subtly shorter duration (sensitivity to interest rate changes) in the fixed income allocation also assisted. With lower rates due before year-end, we expect a contribution from appropriately positioned fixed income allocations later this year too.

Rockhold Asset Management, with contribution from Alpha Beta Partners, Marlborough and LGT, July 2024

ROCKHOLD POST ELECTION WEBINAR

Join Rockhold Asset Management Investment Director Stacey Ash together with Andrew Thompson and John Reynolds of Rockhold’s MPS partner, Alpha Beta Partners Ltd on Thursday, July 18th at 10:00am, as they discuss the likely impact on the economy and markets following the UK General Election result.

They will also take the opportunity to look forward to the forthcoming US Presidential election and what the likely consequences of either candidate’s election. Register your place here.