MARKET COMMENTARY – AUGUST 2024

Markets were impacted by several economic and political developments during July including weaker than expected US inflation and labour market data. Interest rate sensitive asset classes such as small-cap stocks and global listed property rallied. The performance of the global fixed income market was positive and investment grade corporate bonds outperformed high yield bonds. Although year to date gains remain in double digit territory for developed market equities due to the strength of the technology sector, growth stocks recently lost momentum as investors grew sceptical about the potential for future returns from investment in artificial intelligence. Commodities lost ground in July with oil prices declining given the concerns around the impact of weaker demand from China and supply issues arising from Middle East tensions.

The mega cap US technology/AI related companies have been responsible for most of the gains achieved year to date. The US Federal Reserve Bank left interest rates unchanged on 31 July and implied that the interest rate cutting cycle would start in September. Since that meeting, markets fell sharply as there have been signs that US economy is slowing with jobs growth moderating and consumer spending weakening. As interest rates remain restrictive, the chances of a US recession in the medium term have increased.

The UK equity market was ahead of other major developed markets in July, supported by improving economic momentum. This has been evidenced in robust service sector data and stronger than expected economic growth for the second quarter. Markets did not react significantly to the general election, given that a Labour victory was already assumed. As inflationary pressures eased adequately, the Bank of England cut interest rates in July from 5.25% to 5%, this being the first interest rate cut since April 2020.

There is the risk that inflation in the UK may rise again this year before coming back down next year with an increase in energy costs a factor. Interest rate cuts in the UK may therefore be more gradual compared to the US and Europe. UK government bonds (gilts) produced a positive return over the month but underperformed US, Italian and Spanish sovereign bonds which were the strongest performing fixed income markets.

European equities lagged the US and UK in July, impacted by a slight weakening of eurozone economic growth and uncertainty around the French election. However, eurozone government bonds continued to perform well as investors seek higher yields in anticipation of further European Central Bank interest rate cuts. Italy is the top performing major sovereign bond market for the year to date.

The Japanese equity market underperformed other developed equity markets during July. This decline partly reflected the weakness in global tech stocks, but returns were also pressured by a strengthening Japanese yen. The Bank of Japan continued to raise its policy rate and Japanese government bonds were flat over the month.

Chinese equity markets fell in July due to persistent challenges in the property sector and the effects on the broader economy. The Chinese authorities continue to  implement measures to provide liquidity support to the financial system, aiming to stimulate lending and support economic growth amid ongoing market challenges.

While there has been a recent rise in market volatility, signs of a weakening US economy have increased expectations of interest rate cuts.  Interest rate sensitive asset classes such as small cap stocks have seen a sharp turnaround in performance recently, however given the uncertainty around the sustainability of this, maintaining a diversified portfolio with suitable exposure to various regions, sectors and assets is important. Stronger economic momentum and more attractive valuations may be found in areas such as the UK and continental Europe, with the additional benefit of some diversification against US market and political risks.

Total returns in GBP to 31/07/2024

    *June 2024

Source of data: FE Analytics, www.bankofengland.co.uk, www.ons.gov.uk

The content contained in this article represents the opinions of MacIntosh & James Partners Ltd. The commentary in no way constitutes a solicitation of investment advice and should not be relied upon in making investment decisions. Past performance is not a reliable indicator of future results. The value of your investments can fall as well as rise and are not guaranteed.