At the beginning of this year, we expected inflation would prove to be stubborn. Although we have witnessed evidence in the first half that inflation has begun to navigate toward the central bank target of 2%, we still believe it will remain volatile from here. Most of the good news on inflation came from the decline in energy prices and in goods inflation but oil prices have been rising recently, in part due to geopolitical tensions, coupled with goods inflation remaining stubbornly high. Further trade restrictions on Chinese exports could also push up goods inflation. Labour shortages persist in a post-pandemic world and the possibility remains that the net zero transition could push energy and commodity prices higher in the medium term. While inflation trends are encouraging, we are not there yet. A return to ultra-low interest rates appears unlikely, even if rates are set to drift lower over the coming year.
On a more positive note, despite gloomy predictions, the global economy remains resilient. While growth is slowing, the performance of the US market has been robust. As stock market concentration is increasingly under scrutiny, we continue to be cautious about the handful of US companies that have disproportionately determined recent market returns. Since the start of 2023, 60% of S&P 500 returns can be attributed to just three companies, and the magnificent seven stocks (Microsoft, Nvidia, Apple, Alphabet, Amazon, Meta and Tesla) now account for a mammoth 32% of the index. Whilst many investors have benefited from positions in some of these companies, the performance would seem to make little allowance for the risks inherent in quasi-monopoly technologies, including regulatory or political intervention.
The productivity boost from Artificial Intelligence (AI) remains an unknown quantity, but the development of AI will become a focus of industrial policy worldwide, pitting the likes of China and India against the US – the dominant force. Some of the high-growth stocks listed elsewhere in the world appear much less expensive, and arguably better placed to deliver attractive and potentially more sustainable investment returns.
The other key driver of markets this year has been politics with 60% of the world’s population going to the polls - some 4.2 billion people across approximately 65 countries. In the United States, the potential impact of the election in November is a key issue for markets, not least given the world’s leading populist, Donald Trump, is now the clear favourite to win. Populist leaders have posed challenges to democratic norms and will help shape an increasingly precarious world— particularly amid heightened bloc rivalry between the West and China (with Taiwan a perennial worry), a rise in right-wing nationalism across Europe and ongoing armed conflicts in Gaza and Ukraine
In the UK, leading up to the election, the FTSE 100 showed resilience, benefiting from its large multinational companies that make up its major constituents. These firms often have substantial revenues from outside the UK, providing a buffer against domestic economic and political challenges.
The first half of 2024 has underscored the complexity and interconnectedness of global markets. In order to navigate a landscape marked by significant macroeconomic, political and geopolitical challenges, a diversified, risk-managed approach remains essential, with a focus on sectors and assets that can weather inflationary pressures and interest rate hikes. Political and macroeconomic uncertainty persists, but we continue to see good value in our companies as global economic growth is sustained, inflation moderates and as the US Fed may well follow other central banks with rate cuts later this year. It is worth drawing comfort from the fact that despite geopolitical upheaval, energy crises and financial busts, the world economy has grown in 58 of the last 60 years.
The value of investments and the income from them can go down as Past performance is not a reliable guide to 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.
