Q3 Global Market Insights from the Holden & Partners Investment Team
Introduction:
In our latest market commentary, we review the significant trends and events that shaped the global financial landscape over the last quarter.
UK:
UK equities saw early gains but retreated by the end of the quarter, impacted by uncertainty surrounding the Budget and the Bank of England’s cautious approach to interest rate cuts.
US:
Despite early volatility in August and September, US markets ended on a strong note, with the S&P 500 returning nearly 6%, driven by interest rate cuts and positive inflation data.
Europe:
European markets lagged behind, with Germany struggling due to manufacturing decline and weak demand for electric vehicles. Fixed income outperformed stocks, buoyed by rate cut expectations.
Alternatives:
Property and infrastructure sectors experienced strong growth, recovering from previous challenges related to interest rate hikes as expectations of further cuts drove positive returns.
Asia and Emerging Markets:
China’s economy faced difficulties in the early part of the quarter, but a major stimulus package from the government spurred a late rally. Japan, however, struggled, with equities down 4.9% amidst rate hikes and poor US job data.
Sustainability:
There are signs that anti-ESG sentiment is diminishing, with sustainable funds attracting significant inflows. Meanwhile, the effects of climate change continue to be felt, with Antarctic Sea ice reaching near-record lows.
Performance:
Despite volatile markets and geopolitical challenges, all Holden & Partners portfolios delivered positive returns in the last quarter, with ‘sustainable’ investments outperforming their conventional counterparts.
UK
Falling from a generally positive start, UK equities retreated towards the end of the quarter with the FTSE all-share ending the period 2.26% up.1 Following an initial boost from an expected Labour General Election win and the Bank of England (BoE) reducing the Bank Rate by 0.25 percentage points to 5%, the all-share suffered in September, not being helped by increased uncertainty around the Budget.
The newly elected Prime Minister, Keir Starmer, said people would have to “accept short-term pain for long-term good”,2 suggesting various tax increases such as those on capital gains and inheritance tax. While the specifics of the budget will not be known until the end of the month, they do appear to be somewhat hampering the renewed positive sentiment the UK has experienced year to date. UK Gilts were a laggard vs. other developed government bond returns. Holding rates steady in September, the Bank of England hinted at a “gradual approach” to easing policy,3 suggesting a slower reduction in the base interest rate in comparison to other developed central banks.
US
It was a volatile quarter for US equity markets, with large drops in early August and early September. August saw the index fall 8.7% from its all-time peak the month prior due to a combination of poor US economic data and an interest rate hike from the Bank of Japan.4 Following a strong recovery, markets were hit again in early September with the index falling 3% in the first week.5 These fluctuations came amongst broader global equity selloffs. Despite this, the market rallied to have its best September since 2013, in what is normally a turbulent period for equities.6
As tech stocks faltered towards the end of the quarter, with the likes of Nvidia seeing remarkable runs somewhat halted, value stocks outperformed growth in Q3. Looking beyond this volatility, the S&P 500 returned 5.89% 7 over the quarter, buoyed by the long-awaited beginning of the Federal Reserve’s interest rate cutting cycle and positive inflation data. Expectations over interest rate cuts as well as the aforementioned stock market volatility led to falling yields as fixed income markets fared well, with Treasury Bonds returning 4.74% over the quarter. 8
Europe
European stocks lagged other markets as the eurozone continued its laboured recovery. Germany stuck out, with continued manufacturing decline following both a rise in energy costs following Russia’s invasion of Ukraine and falling demand from key export customer, China.9 Car manufacturers struggled due to faltering demand for electric vehicles, something the likes of Volkswagen and BMW have committed to heavily.10 The economy is expected to contract this year, with unemployment expected to rise. The Euro STOXX returned just 1.3% over the quarter, outperformed by the majority of developed markets.11 European fixed income performed less poorly, with European sovereign debt returning 3.96% over the quarter,12 driven by poor stock performance and rate cut expectations. European High Yield bonds returned 3.5% over the quarter.13
Alternatives
It was a strong quarter for Property – perhaps welcome for many following several quarters of pain due to global interest rate hikes to tackle high inflation rates. This quarter represented somewhat of a reversal of fortunes, with the European Central Bank and Federal Reserve both cutting rates, amongst others. The IA Property sector average returned 9.1% over the quarter. Infrastructure also enjoyed a solid quarter, with the IA sector average returning 7.04% as it too was boosted by expectations of rate cuts. These two represented two of the three best performing sectors over the period according to IA benchmarks.14
Asia and Emerging Markets
China continued to make headlines in Q3 – its languishing economy was still scaring off investors in droves between the beginning of June and mid-August, with an outflow of foreign investors’ money of $12bn during the period taking net flows into the negatives for the year.15 The CSI 300 index fell by 4.07% over the first two months of the quarter16 in light of this gloomy sentiment, as investors wondered when, and to what extent, the Chinese government would intervene to ease economic woes.
In late September, they got their answer. The People’s Bank of China announced its most significant stimulus package since the Covid-19 pandemic. This included a reduction in banks’ reserve requirements, cuts to key interest rates (including mortgage rates) and broader property market support in a bid to reverse the sector’s recent fortunes. It also aimed to stimulate the economy to realign itself with growth targets, which looked likely to be missed for some time.17 This led to a rally in the Chinese stock market, with the CSI 300 surging 25.22% in the final few days of the quarter.18
Japanese stocks found themselves at the opposite end of the performance tables, finishing the quarter 4.9% down19 in what was a difficult period of setbacks including a rare rate hike from the Bank of Japan, a strengthening yen and poor US jobs data all working to suppress equity returns.
Sustainability
The anti-ESG sentiment that has caused headwinds for the strategy is now showing signs of abating. Morningstar’s latest report on Global Sustainable Fund Flows shows that the global universe of sustainable open-ended and exchange-traded funds attracted an estimated USD 4.3 billion of net new money in the second quarter of 2024, with European funds attracting USD 11.8 billion over the period.20 With recent developments in regulations such as the FCA’s Sustainability Disclosure Requirements (SDR), we are perhaps seeing investors being able to target a larger range of sectors and strategies, such as those dedicated to ‘improvers’, featuring companies that may have been excluded previously.
The influence of climate change continues to show, with the sea ice surround Antarctica continuing to decline. While not quite reaching the current record low set in 2023, the sea ice maximum is estimated to be the second lowest on record.21 Sea ice typically covers the largest expanse of ocean at some point in September, then begins to slowly melt over the Southern hemisphere’s summer. While natural variability might be able to explain a couple of years of these figures, there has been enough weak years in the past decade to suggest a trend. The impact of melting ice sheets is significant, not just through rising sea levels, but also through a reduction of reflective ice that helps protect the Earth from the Sun’s radiation.
Performance
Patience in investing can be one of the hardest things to master but often the most important. As we have mentioned previously the past few years have been volatile, markets have not always been easy to navigate, and geopolitical situations are rearing their heads constantly. However, sticking to our process and being patient when the impulse reaction is to make changes to our portfolios has been working. The last quarter has seen positive returns for all our portfolios with our ‘sustainable’ portfolios outperforming conventional on a risk level by risk level basis, highlighting the cyclical nature of investing.
We continue to work hard to find good, long-term investment opportunities and it is this time of the year where we start work on setting our asset allocation for the beginning of next year. We will be communicating any changes we make in due course.
1. Morningstar FTSE All Share TR GBP 01/07/2024 – 30/09/2024
2. https://www.bbc.co.uk/news/articles/clyn01p5npgo
7. Morningstar S&P 500 TR USD 01/07/2024 – 30/09/2024
8. Morningstar Bloomberg Aggregate Bond Treasury TR USD 01/07/2024 – 30/09/2024
12. Morningstar Bloomberg Euro Government TR EUR 01/07/2024 – 30/09/2024
13. Morningstar ICE BofA Euro High Yield TR EUR 01/07/2024 – 30/09/2024
15. https://www.ft.com/content/6e7a4129-d365-4905-8d9b-cc3f5ada5187
16. Morningstar CSI 300 TR USD 01/07/2024 – 31/08/2024
17. https://www.reuters.com/world/china/china-unveils-broad-stimulus-measures-revive-economy-2024-09-24/
18. Morningstar CSI 300 TR USD 24/09/2024 – 30/09/2024
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