MARKET COMMENTARY – OCTOBER 2024

Most asset classes achieved healthy returns in the third quarter despite several bouts of market volatility including weaker US economic data and an interest rate hike from the Bank of Japan in early August. Markets rallied in September as the US Federal Reserve Bank (Fed) finally started its interest rate cutting cycle, while new stimulus measures in China and a less hawkish tone from Japanese policymakers provided further support.

Developed market equities delivered positive returns during the third quarter with areas of the market that had previously suffered from high interest rates generally outperforming, such as small cap stocks and global listed property. Growth stocks such as technology companies gave up some of their earlier outperformance but remain in strong positive territory year to date. Fixed income markets including government and corporate bonds were supported by the prospect of lower interest rates, outperforming developed market equites in the third quarter. Emerging market debt is the top performing fixed income sector year to date. Commodity performance was muted over the quarter amid growing concerns around the strength of the global economy, although gold rallied to a record high.

In the US, equity markets continued to move higher in the third quarter. Performance has broadened out beyond the technology sector, with US value oriented sectors and small cap stocks rallying in anticipation of lower interest rates. With the US unemployment rate having increased, the Fed wants to avoid any further weakening in the economy by cutting interest rates back to less restrictive levels quickly. However, towards the end of September consumer confidence over past three years had decreased significantly. The interest rate outlook is perceived to have shifted with markets now believing that US interest rates are likely to reach 3.2% by mid 2025. This expectation has been tempered however by the latest robust US jobs data.

UK economic data has generally been stronger so far this year, although consumer confidence fell in September ahead of October’s UK budget announcement. The Bank of England cut interest rates by 0.25% in August. As in the US a tighter labour market is resulting in persistently elevated wage growth, resulting in a more cautious approach from the Bank of England in terms of the pace of future easing.

European equity returns were more muted in Q3. Economic data has reinforced the sluggish nature of the eurozone recovery, with Germany’s reliance on manufacturing being a detractor, amid both weak demand from China and rising competition from cheaper Chinese exports. With inflation cooling and activity relatively subdued, the European Central Bank delivered its second interest rate cut in September.

Asian equities (ex-Japan) were the top performing major region in Q3. In China, the authorities announced stimulus measures at the end of September, comprising interest rate cuts, lower cash reserve requirements at banks, looser property purchase rules and liquidity support for stock markets. Details of major policies to support growth have not yet been announced which impacted markets, and the government needs to add fiscal stimulus to maintain the rally’s momentum.

Japanese stocks lost momentum recently and ended the third quarter in negative territory, impacted by the interest rate hike in July and guidance of further hikes, combined with the appreciation of the Japanese yen alongside an abrupt unwind of many “carry trades” that were reliant on cheap Japanese borrowing costs.

Another strong quarter across most asset classes means that many parts of the financial market are sitting on double digit returns this year. With inflation having returned to tolerable levels, central banks from the US, Europe and UK are lowering interest rates to support economic conditions. While there is likely to be more volatility ahead, with geopolitical conflicts and the US election in November being potential catalysts, the macroeconomic backdrop should be more supportive of diversified portfolios than has been the case over the past few years.

Total returns in GBP to 30/09/2024

*August 2024

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

This 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.