Markets: Quarterly review Q3-2024:

Despite substantial volatility through the quarter, global equities continued to gain. We saw a number of major Central Banks reduce rates, helping fixed income markets to deliver solid gains. China launched a raft of stimulus measures which helped emerging and Asian markets perform well. We also saw USD strength decline somewhat through the quarter until Israel escalated its attacks across the Middle East, whereupon that weakening trend reversed somewhat toward the end of the quarter.

US equities were mixed through the quarter but still ended the quarter in positive territory as investors diversified their horizons to push most sectors into positive territory. Real estate and utilities sectors outperformed whereas energy underperformed. We saw weakening economic performance as unemployment rose to 4.3% on the back of a disappointing payrolls report in July, adding pressure on the Fed for meaningful rate cuts. Joe Biden withdrew from the Presidential re-election race and endorsed Kamala Harris, thereby reinvigorating the Democratic campaign. In August we saw AI sentiment flip negatively as investors began to recognise that the AI craze may have over-invested into a technology that may take years yet to deliver earnings and profits to US corporates, with many pundits referencing the Dot- Com crash. In September the Fed did reduce rates by 50bps which helped settle markets somewhat as attention pivoted toward the upcoming US election.

Eurozone equity markets posted gains for Q3-24, led by healthcare, utilities and real estate, whereas energy and tech sectors underperformed. French Parliamentary elections in July were unable to deliver an outright majority for any party and we saw Macron eventually appoint his preferred centre-right prime minister against the objections of right-wing and left-wing parties. Of note, Eurozone inflation fell through the quarter from 2.6% YOY in July to 1.8% YOY by September which in turn provided room for the ECB to cut rates by 25bps in September. Expectations for additional cuts remain high, particularly if inflation continues to soften. EU Business activity continued to soften through the quarter as PMI manufacturing fell to 48.9 as the sector experienced further activity declines whereas PMI services rose to 50.5.

UK markets had a positive quarter after Labour’s election win helped fuel positive expectations for the domestic economy alongside a 25bps rate cut in August. Financials, Consumer staples, discretionary outperformed whereas energy underperformed noticeably. Q2-24 GDP was revised down to 0.5% indicating a weakening trend after Q1-24 0.7% alongside expectations for tax increases and spending cuts in their Autumn Budget as the UK grapples with multiple public service crises, tepid economic activity, and ballooning debt. Inflation also rose to 2.2% YOY after Reaching 2.0% in Q2-24, making further rate cuts more challenging.

Japanese stocks and the Yen saw extreme volatility in August after reaching a new high in July, with a market correction fuelled by the BoJ raising interest rates and weaker US economic data which in turn, strengthened the Yen noticeably. Japanese markets stabilised through September on the back of Fed rate cuts and expectations that Takaichi would win the leadership election. However, those expectations were dashed at the end of the quarter as Ishiba became the run-off victor, causing another significant fall in markets in the final days of the quarter along with further weakening of the Yen. Despite most corporates outperforming earnings expectations through Q2-24 and Q3-24; real-wage growth turning positive in August and September; and domestic economic activity showing solid progress; Japanese markets had a testing and negative quarter overall.

Asia markets (excl Japan) delivered strong and solid gains for the quarter, led by China, Hong Kong and Thailand. Whereas Taiwan, South Korea and India underperformed much on the back of Tech sector declines as investors increasingly question how the massive AI spending will deliver revenue and profits in the nearer term. China launched substantial and multiple stimulus measures such as rate cuts and fiscal support in their drive to reverse the slowing domestic economy and restore the property sector, adding further momentum to Chinese and Asian equities.

Emerging markets outperformed developed markets to deliver strong gains for Q3-24. This was despite Japanese-led volatility and Tech declines that impacted EMs through August. However, Fed and EU rate cuts and the large China stimulus helped stabilise emerging markets and fuel strong gains through September. Thailand and South Africa outperformed strongly whereas India, Taiwan, South Korea underperformed as tech-related sectors suffered. Brazil had a negative quarter on the back of looser fiscal spending and as their Central Bank raised interest rates to contain inflationary pressures. Mexico also delivered a negative quarter as judicial reforms became uncertain. Turkey had a poor quarter on the back of capital outflows, weakening economic activity, and further weakening of the local currency.

Global bond markets finally saw the start of the long-awaited rate-cut cycle for major economies, with the US, UK, and EU each delivering cuts in Q3-24, much in the expectation that inflation is now reasonably under a degree of control. These added some momentum for a weaker USD against most major currencies, adding some respite for global trade activity. We saw US 2Y Treasuries rally by 111bps as the yield curve steepened and somewhat normalised by the end of the quarter (no longer inverted). Gilts rallied on the back of Labours’ electoral victory and 25bps in rate cuts by the BoE. EU Government bond markets were mixed after the EU cut rates by 25bps, with German and French yields declining while Spanish and Italian bonds rallied. Canada continued to cut rates as inflationary and unemployment pressures continued. Japan raised rates in August as the BoJ attempts to begin ‘normalising’ its monetary policy, causing severe market and currency volatility through August. Global High-Yield continued to outperform Investment Grade bonds. Convertibles fared well over the quarter much due to higher volatility as investors chased downside protection.

Global commodities generally underperformed through Q3-24, driven by the lagging energy sector as global demand weakened despite the escalating tensions in the Middle East. Agriculture, livestock, industrial and precious metals all outperformed for the quarter.

Digital assets were mixed for the quarter as Bitcoin ended largely flat and Ethereum declined. We continue to see increased institutional access to this asset class as new ETFs and option-trading are approved by regulators, and as further regulatory controls are progressively introduced. This asset class remains largely a risk-oriented environment for investors.

Andy Blandford