July 2024 Commentary

The second quarter of 2024 was relatively strong for most assets, characterised by a reassessment of inflation and interest rate expectations, shifting central bank policies, and notable geopolitical and political developments.

The quarter began with challenges as growing evidence of sticky inflation caused investors to rethink the prevailing “soft landing” narrative, with a “no landing” scenario gaining traction. Major equity markets, which started the month at new all-time highs, quickly declined following a series of strong U.S. economic data releases, including a robust jobs report and hotter-than-expected inflation figures. These data points led markets to reduce the anticipated number of rate cuts this year. Federal Reserve Chair Jerome Powell acknowledged that it might take longer to achieve the inflation target, reinforcing expectations of prolonged higher interest rates. Additionally, geopolitical tensions in the Middle East, marked by Iran’s retaliatory air strikes on Israel, temporarily spiked oil prices, though prices soon fell back as further escalation did not materialise.

In May, markets regained some footing as dovish central bank rhetoric and softer economic data provided relief. Federal Reserve Chair Powell set a more reassuring tone by downplaying the likelihood of rate hikes and announcing a slowdown in the pace of quantitative tightening. A slowdown in U.S. job growth and inflation readings that met expectations eased concerns of an overheating economy, keeping the door open for potential rate cuts.

By June, the focus had shifted more decisively towards rate cuts. The European Central Bank delivered its first rate cut since the pandemic, lowering the deposit rate by 25bps to 3.75%, and the Bank of Canada also initiated its first rate cut of this cycle. While the Federal Reserve did not cut rates, the May Consumer Price Index (CPI) release showed the slowest monthly core CPI growth since August 2021, solidifying expectations for future rate cuts. Political developments also came to the fore, particularly with the European Parliamentary elections and the announcement of a snap legislative election in France, which led to a notable selloff in French assets and a significant widening of the Franco-German 10-year spread; however, the impact further afield was more muted.

Given this backdrop, equities were well supported, with the global index up by +3.4%, led by Emerging Markets (+6.2%) and Asia ex Japan (+7.9%). UK (+3.6%) and US (+3.9%) equities also performed well, while Europe ex UK (+0.9%) lagged, given the prevailing political uncertainty. In terms of equity styles, growth stocks (+6.3%) outperformed value (-0.4%), and small-cap stocks (-1.4%) underperformed large caps (+3.4%). There was a wide variation in sector performance, with Information Technology (+11.4%) and Communication Services (+8.2%) being the strongest two sectors, while Materials (-3.1%) and Real Estate (-3.8%) lagged significantly.

Fixed income markets were more mixed, with elevated income levels helping to offset capital losses given slightly higher yields. Looking at the details, global government bonds (+0.1%) and global investment-grade credit (+0.3%) finished the quarter flat, lagging behind the riskier areas as the strong rally in equities helped spreads to tighten. This was seen in global emerging market debt (+0.4%) and especially global high yield (+1.5%).

In the real assets space, global real estate (-2.1%) finished the quarter in the red, while global infrastructure (+2.6%) posted a respectable return. Commodities were strong over the quarter with industrial metals (+9.8%) and gold (+4.9%) rallying, the latter being well supported by central bank purchases of bullion.