As we reached the midpoint of 2024, equity markets in Q2 continued the overall positive trend seen in Q1. AI continues to be a positive momentum trend so far, despite some downward movement mid-quarter. This continues to benefit overall US indices due to the size of the players, with Nvidia being the poster boy for this; during June, it became the most valuable company in terms of market cap, slightly ahead of Microsoft. Q2 performance has been positive for holdings in large-cap stocks and for those with an AI tailwind.
Earlier in the quarter, with inflation still surprising on the upside in the US, it caused markets to recalculate interest rate cuts for 2024, and the timing caused some turbulence for equities and bonds. However, as the quarter progressed, it appears the market is more comfortable with the path of inflation as it trends more favourably towards the Fed’s liking, and a cut seems likely in Q3, perhaps in September.
UK inflation also came closer to target in June, and although recent weeks have been dominated by the upcoming election, it seems likely that again, lower inflation and interest rate cuts, likely to be in Q3, will provide some tailwind for the next Government, which is likely to be the Labour Party, to take their business-friendly programme out to the market.
UK smaller cap equities had a strong quarter, aided by improving monetary conditions and through the sheer discount they offer on a comparative basis to global markets. If this is repeated in Q3, that will be an indication, in my view, of markets viewing UK equities more favourably post-election.
The European economy is showing signs of growth at a GDP level, with inflation also indicating a downward trend, and the ECB feeling comfortable enough to cut interest rates by 0.25%, although with a hawkish tone. The sectors overall, whilst benefiting from a more positive economic environment, were certainly affected by politics, with elections delivering more right-leaning parties to the European Parliament, which led to a surprise snap election call by President Macron. This is a risky move which at the moment has been received negatively by markets, who perhaps did not see the need for it at this stage.
China is showing signs of life after a prolonged negative period, with indicators from services and manufacturing becoming more positive, and fiscal policies beginning to have a positive effect.
India, having held its election, returned Narendra Modi as Prime Minister, although with a less than expected overall majority. India, on the back of strong growth over the last few years, should continue to offer opportunities for investors, with economic reforms likely to continue, but the pace of reforms is likely to slow post-election. This has been demonstrated by the strongest equity sector performance in Q2.
Q3 should continue to see inflation falling, and the timing of interest rate cuts will remain a continuing discussion. We cannot ignore that, certainly in Europe, and particularly in France, an election win for the far-right party has ramifications overall for Europe.
The US election, with the outcome at best 50/50 between the two chosen candidates at the time of writing this review, has had a minor impact so far on US markets, but this will change as we move into Q3.
So far, it’s been a decent year for equities and bonds, with likely rate cuts also beginning to provide better returns as the year goes on.
