After a strong opening half to 2024, and on the back of a strong Q4 in 2023, Q3 certainly proved to be bumpier for equity markets.
The best example of this is the Technology Sector, which was the worst performer for Q3. Some of this can certainly be attributed to its significant outperformance over the previous 12 months, with equity markets benefiting from the belief that AI would be transformative. This benefited the Mega Caps such as Nvidia, and due to their size, meant an index like the S&P 500 also benefited overall US indices.
We have therefore seen an element of correction in the biggest names with some profit-taking, and some realism kicking in, in terms of future projected earnings.
The UK, having elected a new Government in July, initially benefited from the hope that a more stable government would provide an environment for more investment in the UK. The jury is very much out on this, and the Budget in October will provide some clues as to how they will look to get the private sector and foreign investment to solve the problems faced by UK plc.
With any new Government that has been out of office, their language has been slightly on the negative side, but it’s early days, and hopefully, they will soon pick up the pace to find the catalyst that the UK needs.
We have seen Western Central Banks deliver their first rate cuts, showing confidence that they feel inflation is within the target range of 2%, and it is likely that we will see further cuts going forward, although the pace of these will be affected by the state of their respective economies and any upside surprises to inflation. But it is fair to say the market is cautiously optimistic that further rate cuts will follow during this year and into 2025.
As the charts below show, this is proving to be a more productive environment for bonds, and the return differential between cash and bonds is now clear and likely to widen as rate cuts follow. This is good news for portfolios as bonds should, going forward, provide essential diversification from equities and negatively correlated assets.
China came late to the party in Q3, as the chart shows, but it certainly made an entrance. Whether the measures announced by the Government prove to be just a short-term rally or the first of more aggressive action to encourage the Chinese consumer to take more risks, we will see. The structural property issues need to be dealt with before we see a sustained rally.
The US dollar weakening as rate cuts arrive should help this region going forward in both equities and bonds.
The outlook for the rest of the year remains reasonable, even considering the elevated levels of geopolitics now. Short-term volatility is to be expected, and one hopes that cooler heads can prevail going forward.
The US election, which is less than a month away, seems to have recently taken a back seat to other events, but it remains a tight race between the two protagonists. The markets now at least seem calm over the outcome and see pros and cons for both candidates in terms of market and economic impact.
It has been a decent year so far for markets and assets, with the prospect of taming inflation and implementing rate cuts without any meaningful recession looking like a distinct possibility. This seemed like a tough task for central bankers two years ago, but they have managed to navigate their objectives well so far.
