Entering the final quarter of 2024, equity markets are in a buoyant mood despite global markets facing a dynamic and often turbulent landscape, with key economic indicators, geopolitical developments, and shifting monetary policies shaping the performance of different asset classes. The outlook, and optimism, is a far cry from 12 months ago, when supply chains were hugely disrupted, inflation was in double digits and well ahead of central banks’ targets, prompting rapid and substantial interest rates hikes despite an uncertain demand environment. While we remain cautious about the immediate outlook, the world economy had proved far more resilient than expected and several promising long-term investment themes benefited from a broadening out of the equity market returns away from a concentrated, narrow band of technology shares.
Concerns over the summer about government debt levels and geopolitical risks appear to be among the main drivers of demand for gold, pushing the price to all-time highs. The prospect of falling real interest rates is also likely to have boosted demand. One could argue that markets have shifted to ‘goldilocks’ territory whereby slowing inflation has signalled the peak for interest rates while broad macroeconomic indicators that have been weak are not expected to deteriorate further. Labour markets remain resilient for now with low levels of unemployment, while real wage growth is supportive of consumer demand, albeit presenting a challenge to corporate profit margins. In the wake of the Federal Reserve rate cut, we see this as a rational development which is seeking to prioritise growth over inflation in our eyes, and we believe that this trend has further to run.
Elsewhere, ongoing geopolitical risks, including the continued Russia-Ukraine conflict, tensions in the Taiwan Strait, and uncertainty in energy markets, impacted both market sentiment and sector performance. Events in the Middle East have taken a worrying turn towards escalation. Meetings with analysts and policymakers have suggested to us that Netanyahu may have calculated that he has something of a free hand to push the conflict, this side of the US election. Meanwhile, the Biden administration will be very wary of any censure of Israel ahead of the November vote, in case it costs them in the polls. Moreover, it appears that Iran is eager to avoid a major conflict, but if there is larger retaliation from Hezbollah or Iran, inasmuch as this draws the US into a conflict, then this may benefit Trump as a more vocal Israeli supporter relative to Harris.
China remains the major negative in 2024, with lacklustre growth despite government attempts to stimulate. Whilst Beijing’s stimulus package announced last week administered a shot of adrenaline to financial markets, allowing Chinese risk-assets to rally from very depressed levels, a Chinese business cycle recovery remains an unlikely scenario in the short-term. Conversely, there are good reasons to remain upbeat about the outlook for Japan and significant progress continues to be made in corporate governance reforms. Corporate results have been generally positive. In Europe, economic data remains relatively downbeat, due to weakness in the French and German economies and the reality for the time being is that the Europe looks set to remain a low growth economy.
Political certainty in the UK will be helpful for the domestic economy and address the UK’s elevated risk premium that has persisted since the damaging Autumn Budget of 2022. The UK stock market continues to remain depressed in valuation terms relative to other developed markets, offering double-digit discounts across a range of valuation metrics, combined with a FTSE 100 dividend yield of c3.6%. The UK economy is growing at a modest pace, housing market and construction activity is picking up, and employment remains relatively robust. Consequently, it might appear that the economy is coping with elevated interest rates. Yet with a tough Budget ahead, the growth trajectory may remain uncertain until there is further clarity in the government’s fiscal policy. The Chancellor will deliver the Autumn Budget to Parliament on 30 October and we will be in touch to provide a full summary of the key changes to Labour’s tax policies.
With the UK’s election now over, the market’s attention will turn its focus to the US election in November and it is hard to discern the outcome with any confidence. The replacement of President Biden as the Democratic candidate contributed further to the uncertainty, and we continue to expect that geopolitics will play a more significant role in markets in the last quarter. While the US election is still looking impossible to call, its economic trajectory in the near term looks relatively healthy and concerns with respect to any weakness in the labour market may currently be overstated. The US election will undoubtedly be a major risk event coming over the horizon and recent momentum has continued to edge towards Harris. The possible escalation of trade tensions risks a rise in inflation by increasing the cost of imported goods along supply chains.
Overall, there are grounds for caution as markets remain susceptible to swings in consumer confidence and global demand, as well as the ongoing conflict in the Middle East. However, we expect inflation to cool further going into year end. Central banks must appear to have a firm enough grip on inflation to ensure it trends back to target levels, while also safeguarding against a sharp economic slowdown. This suggests a very gradual easing of monetary policy. The resilience of the household and corporate sectors and the magnitude of rate cuts lends itself to supporting a constructive stance on equity markets as we head into year end.
The value of securities and the income from them can fall as well as rise. Past performance should not be seen as an indicator of future returns. All views expressed are those of the author and should not be considered a recommendation or solicitation to buy or sell any products or securities.
