Q2 2024 Market Commentary

26/07/2024

Global Markets

Note: All quoted equity performance figures are in GBP terms.

Global equities continued their positive trajectory over Q2, as investor enthusiasm for AI continued, and Emerging Markets (EM) stocks posted strong returns. The MSCI ACWI index returned 2.8% over the quarter, with Emerging Markets (+4.9%) outperforming Developed Markets (+2.6%).

The S&P 500 finished the quarter up 4.2%, with large AI names, such as Nvidia and Apple, once again driving a significant portion of the market’s returns. IT and Communication Services were the strongest performing sectors, whilst Materials and Industrials were the weakest performers.

It was a positive quarter for UK equities, with the FTSE 100 reaching record highs and finishing the quarter up 3.7%. Small and mid-sized companies performed particularly well, as market participants anticipated a turnaround for domestically-focused companies after many years of underperformance. Stocks in the Eurozone suffered over the quarter, driven in large part by falling expectations for future rate cuts and a snap election in France causing significant uncertainty.

Japanese equities delivered a slight positive return in Japanese yen terms, but continued yen weakness meant a negative return in sterling terms.

Emerging markets had a positive quarter, helped in particular by strong performance in China and Taiwan. Low Chinese valuations helped investors find comfort in returning to the region, given Japan’s currency weakness and rising Indian valuations. Taiwan’s heavily AI exposed economy benefitted from the continuing interest in this space. The rally in India continued, with benchmarks reaching record highs in Q2.

Equity Styles

Quality (+6.3%) was the strongest performing equity style over Q2, meaningfully outperforming the broader market. Momentum achieved a similar return, up 6% in another strong quarter for the style. The Momentum and Quality indices contain many of the large names leading the AI rally, which has helped to drive strong returns for both indices this year. Value again lagged behind the broader market over the quarter, finishing down 0.8%.

Inflation

Q2 saw the first interest rate cut by a major central bank so far this cycle. The European Central Bank cut rates by 25bps in June. However, this was soon followed by the release of May’s inflation data which came in at 2.6%, up from 2.4% in April. This increase in the inflation rate may limit scope for further rate cuts.

Inflation continues to fall in the UK, with April’s 2.3% rate followed by May’s reading in coming in exactly at 2%, finally meeting the Bank of England’s (BoE) target for the first time since 2021. Despite this, the BoE has kept rates steady so far this year, as services inflation remains stubbornly high.

US inflation eased slightly over the quarter, with May’s 3.3% reading falling slightly from 3.4% in April. The Fed have so far kept interest rates steady, but the latest dot plot indicated they expect a single rate cut in 2024.

Fixed Income

It was another mixed quarter for fixed income assets. Fresh concerns around US inflation data meant the quarter got off to a challenging start for bond markets, but softening inflation and labour market data allowed for a recovery as the quarter went on. Corporate bonds outperformed Government bonds over the quarter. Within corporates, High Yield outperformed Investment Grade, with the two indices up 1.4% and 0.2% respectively. High Yield returns were supported by their higher coupon payments and lower duration. Government bonds performed less strongly over the quarter, with the US being one of the strongest performing regions, following a sharp initial sell off. UK Gilts delivered negative returns over the quarter, with sticky services inflation data causing the BoE to push back their first rate cut this cycle until later in the year.

Note: All quoted fixed income performance figures are in GBP-hedged terms.