2024 Market Update

Following my outlook in January I am writing with a quick update on the year so far and a look forward for the rest of the year and into 2025.

One important point I would like to make is that many global issues, especially Politics and the outcome of the many elections we have in 2024, might feel very important to us on a day-to-day basis but might have a very different impact on investment markets and so do please read the following through the lens of investing.

Global equities have been performing well, with US equities gaining 15% in the first half of 2024, led by companies like Nvidia, Microsoft, Alphabet, Amazon, Meta, and Apple, which contributed significantly to market progress.

The economic outlook indicates that the global economy is expected to grow by 2.6% in 2024, with improved growth prospects in the US and China due to factors like loose fiscal policy, immigration, and government stimulus programs.

Market ‘breadth’ has been a concern, with the above five technology stocks driving over half of the returns in the US market; as global growth continues this should lead to opportunities in other sectors like industrials that are connected to the Artificial Intelligence theme; very recently we are starting to see a broadening of market returns.

Market risks related to inflation and interest rates are expected to shift to a positive tailwind in the second half of the year, which should be good for both shares and bonds. Central banks, like the European Central Bank (ECB), are already cutting interest rates and others are likely to follow suit.

Here is a chart of four different Risk Benchmarks and the main UK and US Stock markets so far in 2024; steady, but the US continues to serge ahead… for now.

Inflation

Inflation hasn’t yet returned to pre-covid levels and is unlikely to drop back this much any time soon. Goods, energy and food inflation have all fallen but services inflation is still high, though this has started to fall slightly in recent weeks. ‘Services’ includes ‘shelter’ e.g. rent and other services such as hospitality.

Interest rate cut forecasts from the ‘experts’ have see-sawed so far this year but the current consensus view is that the first US interest rate cut should now be expected in September. The ECB has already started cutting rates, very slowly, and UK rate cuts might be pushed out into 2025 as services inflation in the UK remains ‘stickier’ than elsewhere.

US – The upcoming election is a key risk, with potential market volatility depending on the election result, especially following the attempted assassination of Donald Trump and the withdrawal of Joe Biden.

If Kamala Harris is selected as the Democratic candidate then Democratic party policies are likely to remain unchanged and so volatility in markets could be short lived, but if they enter the time consuming process of selecting a different candidate (increasingly improbable at the time of writing) then the inevitable political uncertainty could drive US share and bond volatility for longer.

According to the polls and bookmakers the Republicans are now more likely to win, but what might that mean for investors? Potential tax cuts, more deregulation, more protectionism and more oil drilling could be good for US corporate profits and might help bring down inflation. This might not be great for the planet and society but could be good for business.

In addition tariffs on goods entering US from China (and the rest of the world) could add to the short term inflation problem.

Europe – there has been a backlash against various EU led initiatives, like climate change policy and immigration leading to a swing towards the right in many countries.

France – President Macron called a snap election as the Far Right were gaining traction in EU elections; several left wing, centrist and right wing alliances formed as tactical voting led to a deadlock. The major coalition is now on the left of the house which is probably negative for French investment returns but any law changes are very unlikely for at least 12 months when another round of elections is expected.

UK – the new Labour majority government was not a big surprise with ‘time for change’ as a leading driver; but will they be able to do what they said they would do? So far they remain quite centrist and don’t appear to be planning on drifting back to the ‘old labour’ way. They are likely to be more fiscally responsible and will target growth BUT can they actually do it as the challenges are significant and the budget is tight – for example the demands on the NHS and the hot potato of immigration.

There might, however, be a big shift with the relationship with Europe, which must be positive for both sides, especially with respect to defence, cybersecurity and trade and even more so if the US becomes more self protectionist under Trump.

The French election results, however, were unexpected. We had anticipated significant market movements, but the outcome has been a 3-way hung parliament, with all other parties joining forces to prevent the far-right Rassemblement National (RN) from gaining power. This situation suggests potential political turmoil in France for at least the next 12 months until another election can be called. This is not a favourable outcome for President Macron or Europe as a whole. Despite this, the FX markets have remained stable, as the EUR had already weakened prior to the election.

Inflation data and interest rates continue to be the primary drivers of the FX markets.

Here is a Forecast Snapshot of where the banks think FX markets will be at the end of Q3 (30th September).

GBP/USD
Current 1.2840
Barclays 1.28
UniCredit 1.26
Wells Fargo 1.26
BNP Paribas 1.27

GBP/EUR
Current 1.1860
Barclays 1.22
UniCredit 1.16
Wells Fargo 1.19
BNP Paribas 1.20

EUR/USD
Current 1.0825
Barclays 1.05
UniCredit 1.08
Wells Fargo 1.06
BNP Paribas 1.05

I am, once again, very grateful to the teams at Evelyn Partners, Rathbones, New Horrizons and Moneycorp for their help in putting this summary together and hope it is useful in framing where we are today and how we got here.

Here are some further links to supporting views on the above:

https://www.evelyn.com/insights-and-events/insights/investment-outlook-july-2024/

https://www.rathbonesam.com/knowledge-and-insight/review-week-biden-bows-out

https://www.rathbonesam.com/blog/guess-whos-back

If you listen to podcasts I can highly recommend the Sharp End Podcast from David Coombs at Rathbones Asset Management

I am away on holidays until 5th August but if you have any questions or need further assistance, please feel free to reach out via the below channels, or the booking system – always drop me a quick message if you need a time slot outside of those available.

For now, have a great day, and a wonderful summer

Best regards

Peter Brooke