July – September 2024

The period July to September 2024 was a volatile yet ultimately positive one for financial markets with positive returns across both fixed income and equities. In local currency terms, the Hang Seng Index in Hong Kong led the way, benefitting from the effects of Chinese stimulus in late September, and rising +19.27% over the period. On the other hand, the Nikkei 225 was the biggest laggard, experiencing a particularly turbulent August and September, resulting in a -4.20% loss. From the perspective of a UK investor, the past 3 months were largely positive despite Pound Sterling appreciating against most currencies – strengthening +1.92% against the Euro and +5.75% against the US Dollar. Corporate bonds and emerging markets were the best performers, whilst the appreciation of Japanese Yen against Sterling resulted in a gain in Japanese equities for UK investors despite losses in local terms. Returns were generally positive, with the two significant laggards the US and Europe. Full index returns for a Sterling investor are below:

This performance came against a backdrop of falling inflation across regions, with most central banks already in their rate-cutting cycle. Headline inflation dropped from 2.6% to 1.8% in the eurozone, with the European Central Bank responding by reducing their headline rate by another 25bps to 3.5% – policymakers also indicate they are open to further cuts in 2024. The Bank of England also implemented their first cut on 1st August, reducing it from 5.25% to 5% by a narrow 5 votes to 4. This comes against a calmer macroeconomic backdrop, as headline inflation for July and August came in at 2.2% – and GDP growth was announced at 0.5% for the second quarter. In the US, the Federal Reserve had held off cutting their interest rate, believing that steady GDP growth and a robust labour market allowed them extra time to deal with sticky inflation, particularly in services. This mindset changed in August when cracks began to show within the labour market following an unexpected rise in the unemployment rate to 4.3% – an event which triggered the ‘Sahm rule’, a historically accurate indicator that forecasts an imminent recession. In response to these developments, the Fed delivered its first cut at its 18th September meeting, surprising markets with a larger 50bps reduction to 5% and keeping the door open for further cuts later in the year.

The UK general election was held on 4th July, with the Conservatives having been widely expected to lose their governing majority after 14 years in power, and the only question mark being as to the severity of their defeat. Despite initial fears that their number of MPs would diminish significantly to around 70, the result was not quite as bad as feared but did still represent a significant loss of seats for Rishi Sunak’s party, dropping from 344 to 121 seats – including the defeat of twelve Cabinet ministers and former Prime Minister Liz Truss. Labour, on the other hand, secured one of their best-ever results, winning a total of 411 seats and securing a massive majority of 174, the second-highest majority of any government since the Second World War, albeit with the second lowest share (33.7%) of the popular vote since 1857. With the UK budget due to be unveiled on the 30^th October, all eyes will be on new Chancellor Rachel Reeves to see if she can walk the fine line between encouraging economic growth, balancing the books, and avoiding a collapse in consumer and investor confidence.

There were some rather extreme bouts of volatility seen in August, triggered by the US unemployment rate unexpectedly rising to 4.3% (vs 4.1% expected). This increased fears that the US economy was more fragile than initially thought – and caused indices to fall sharply in the first five days of the month. Concurrently, the Bank of Japan raised its own interest rate to 0.25% in a surprise move, causing the Japanese Yen to rapidly strengthen against the already buffeted US Dollar. This, in turn, created a knock-on effect that forced institutional investors to quickly unwind their ‘carry trades’ – a significant position taken by those anticipating the Yen’s continued weakness. The Nikkei 225 subsequently fell -12.40% on 5th August – suffering its worst one-day fall since October 1987. The poor start to the month was, ultimately, short-lived as by the close of the month, indices were back to similar levels they had finished July, with the S&P 500 rallying +2.30% and the Nikkei 225 falling just -1.16%.

On 24^th September, the People’s Bank of China (PBC) unleashed a massive stimulus package to support their ailing stock market, boost the underlying economy, and, in particular, ease the housing market crisis. Headline measures included cutting the reserve ratio requirement (the amount of reserves lenders must hold) by 50bps – freeing up around 1 trillion yuan ($142bn) for new lending, reducing the deposit needed to buy a second home from 25% to 15%, and cutting the 7-day repo rate by 20bps. In addition to the housing-focused policies, Pan Gongsheng, the PBC governor, announced plans to relax borrowing restrictions for investing in stocks and shares on Chinese exchanges. Stock market impact in the final week of September was extremely positive – with the Shanghai Stock Exchange Composite Index rising +21.37% before closing for the country’s weeklong National Day holiday from 1^st October to 7^th October. Commodity prices also rose in anticipation of Chinese demand roaring back to life – with copper, aluminium, zinc, and iron ore all rallying.