Doves Fly and Dragons Roar as Markets Roll On
This update covers the period up to October 15th 2024. As usual, we have taken the basic asset class chart (fig.1) back to the end of October last year, the latest full Powell pivot where he signalled victory over inflation and strongly suggested rate cuts were coming, and probably quite a few of them in 2024.
With the US Federal Reserve cutting interest rates by 50 basis points on September 19 and China announcing a huge stimulus package to boost growth at the end of September, a lot has happened in markets over the last month.
Asset Class Performance Since the Last Powell Pivot > 01/11/2023 – 15/10/2024 (fig.1)*
Macro & Markets
The US
The first big event was the Federal Reserve’s decision to kick off the US rate-cutting cycle with a bumper 0.5% cut, rather than the more normal 0.25%. As ever, the Fed’s commentary surrounding its move was almost as important as the cut itself. The Fed usually only cuts rates by as much as 0.5% when it is staring a recession in the face and Chair Powell did his best to argue that this was not the case this time. He emphasised that the economy remains strong and the cut was just a reflection of greater confidence in inflation returning to 2% and the desire to head off any further weakening in the labour market.
The Fed now sees rates falling from their current 4.75-5.0% to 4.4% by year-end and to 3.4% by end-2025. That said, it continued to emphasise the uncertainty over the speed and extent of the forthcoming decline.
China
The second big event of the past month came from China, as efforts intensified to stabilise its economy and markets through a series of announcements aimed at restoring investor confidence and addressing the challenges of a sluggish economy. Most notably, the head of the Bank of China announced several key measures, including cuts to the reserve requirement ratio, policy rates, and mortgage rates, along with liquidity injections. These moves reflect China’s awareness of the need to act decisively, especially as pressures mount on the leadership to deliver economic growth.
In our recent special market updates (click here to read), we have consistently highlighted that the scale of China’s fiscal and monetary stimuli has not been sufficient to significantly alter market sentiment. While these new announcements are positive, they are not game-changing enough to suggest a sustained turnaround. However, they do signal the leadership’s understanding of the gravity of the situation, particularly in light of growing discontent over property valuations and general economic performance.
In summary, the mood has improved, and China’s markets have responded positively, but without sustained and meaningful follow-through, this could be another false start, as we have seen before. The Chinese government still needs to address fundamental issues, including demand-side stimulus, to bring about lasting recovery.
The UK
Turning to the UK, despite the negativity that has persisted around equities since Brexit, we have broadly been positive on the asset class for the last several years. It is with this in mind that with Labour’s first Budget taking place on October 30, not only ours, but the eyes of all investors will be on Rachel Reeves and what she delivers.
After a broadly positive start to life, it’s not controversial to say that in the last three months Labour have lost the narrative completely. While Keir Starmer has started to make changes to try and steady the ship, FTSE 250 UK equity managers will be hoping for some positive rhetoric around the economy following the budget statement.
The doom and gloom we have seen in the last three months has simply crushed the animal spirit out of UK investors at a stage they had only just been revived. If the budget goes badly, it’s a depressing outlook on where we had been, and we would become a lot less positive on the asset class than we have been.
This is why, looking ahead to the Budget, not only what Reeves says is important, but how she says it is crucial. From recent conversations with financial advisers, many have said that never in their careers have they had as many concerns from clients ahead of a Budget, which is telling itself.
Performance & Positioning
In an environment of interest rate cuts and the surprise stimulus package we saw come out of China at the end of September, several things have worked to aid performance in the last month. Firstly, our fixed income positioning has proved beneficial, with several of our individual bond managers performing well.
Then more broadly our overweight positions in Asia and emerging markets meant the portfolios have performed well on a relative basis this month. Recent actions have driven a bounce in Chinese assets, with comparisons being made to Mario Draghi’s “Whatever it takes” moment that stabilised the Euro.
The market volatility provides opportunities for skilled active managers, particularly as further announcements are expected, and the risks of sitting entirely on the sidelines increase. While the recent fiscal stimulus package is encouraging, its impact will depend on whether it is followed by more comprehensive and coordinated efforts. As always, we remain vigilant, monitoring developments closely.
The general narrative has been going our way, and since June we have seen we have seen the continuation of value as a style do well. For example, our best performing US fund was M&G North American Value.
While we remain a bit concerned in the US and think inflation will come back at some point next year, the overall backdrop is what we would call reasonable, which is why 60% of our US allocation is invested in the S&P 500 and 40% split in value and small/mid-cap strategies. However, from a valuation point of view, we still think the bigger money is still to be made outside of America.
Outlook
Given what is going on in the UK with the Budget, the US and the upcoming election, and in China where we need to see evidence that the recent stimulus packages we have seen will be sustained, this is a classic time when investors want to be throwing their chips all over the table. None of us know how things are going to go, which plays to the tune of staying diversified.
There is also the risk of doing the classic de-risking of portfolios and running to cash. This is because in the era we are in now and the debt the world has, if markets tank there will be near emergency interest rate cuts or monetary stimulus – with the ECB having the option to slash rates – if investors rush to cash they could miss a huge rally.
In our opinion, we don’t think markets can sink, and stay sunk, like they did before because it’s our view that this is not the world we are in anymore; the whole system would collapse. It is basically not an option to let stock markets sink, hence why at this stage it is not the time to take risk off the table, but to make sure that the risks are spread across multiple assets.
*Information is short term in nature to demonstrate performance over a specific time period. Please contact IBOSS for long term data, including since launch and/or 5 years.
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