Monthly Market Commentary - July 2024

The first half of 2024 provided a favourable market environment for investors, with stock benchmarks in the UK, US and continental Europe hitting record highs while the fixed interest space continues to offer relatively attractive yields compared to much of the past decade. The MSCI All Country World index ended the first six months of the year up 12.7%. (all returns in sterling, unless otherwise stated).  

June saw a re-emergence of US leadership in equities as a 4.1% return for the MSCI North America index lifted the MSCI All Country World to a 3.0% monthly return. Political uncertainty and a period of consolidation after a good run higher in previous months meant the MSCI UK (-1.04%) and MSCI Europe ex UK (-1.61%) ended the month slightly lower. That said, the second quarter on the whole was good for UK stocks as they outperformed peers and ended it up 7.8% year-to-date.

Economic data continues to paint a mixed picture, leaving central bankers more reluctant to loosen monetary policy than was widely assumed at the start of the year. Although inflation is back at far more palatable levels in year-on-year terms, rate setters remain concerned that the fight is not over and that a significant reduction in interest rates could cause another push higher in price pressures.

In the UK, headline inflation came in at 2% in May, the first time in three years it has not exceeded the target level of the Bank of England (BoE). However, the core measure, excluding food and energy, came in at 3.5% and services inflation is higher still at 5.7%. Those calling for rate cuts will likely cite the headline figure, a rise in the unemployment rate to 4.4% — the highest level since the end of 2021 — and a dip in leading economic indicators in June. But on the other hand, first quarter GDP growth was the fastest pace since 2019, albeit against a pretty low bar, beating expectations and then being revised higher to 0.7%.

Despite the fall in headline inflation being announced the day before the BoE’s most recent policy decision, rate setters decided to stand pat and maintain the base rate at its 16-year high of 5.25%. At the time of writing the chances of a cut at the next scheduled rate-setting decision, in August, are in the balance.

Gilts performed well in June, with a broad-based index returning 1.3%, helped by the aforementioned softer data. We remain modestly overweight duration due to the expectation of easier central bank policy and are also underweight credit versus government bonds due to current tight spreads.

In the US, the Federal Reserve (Fed) remains in a holding pattern, waiting for either inflation to hasten its decline or the economy to weaken sufficiently to require supporting. Recent economic data hints at a softening of consumer strength and the unemployment rate has ticked higher, but on the whole it seemingly continues to fare pretty well. 

Events in recent years suggest the era of zero interest rate policy is firmly behind us and that we are now in a new environment of higher-for-longer. Widespread expectations for significant cuts this year have failed to transpire, and the base case is now for one to two 25 basis point reductions. This change of view has come about due to leading economies displaying ongoing resilience and inflation, while reined in from runaway levels, not being sufficiently squashed.

Britons head to the polls

By the time you are reading this the outcome of the UK’s general election will be known. From an investment point of view, we have conducted significant preparatory work and plan to monitor developments closely. That said, although elections undoubtedly matter, the lack of fiscal headroom and a closer alignment to the political centre reduces the probability that the outcome is as big a market mover for UK government bonds and individual equity sectors as we may have seen in previous years.

It’s prudent to avoid drawing any strong conclusions based on historical precedents. For instance, looking at UK election results since 1979 it appears at first glance that UK equities perform better when there’s a change of government or a victory for Labour (UK MSCI ≈5% higher 6 months later vs ≈-2% in other instances). However, closer inspection reveals the positive performance can be almost entirely explained by global market moves. If viewed in relative terms against a global benchmark, UK equities at these times have been pretty much flat.

In our opinion, the US election in November poses a bigger risk to global markets, particularly regarding the treatment of the burgeoning US budget deficit. The American political divide has become increasingly fractured in recent years and as the world’s largest economy, the outcome will likely have more far-reaching consequences than the next incumbent of Whitehall. We are guarded against complacency though and stand ready to act should any attractive investment opportunities arise.