Q2 2024 Review & Q3 2024 Outlook

Market & Macro Review for Q2 2024

With Q2 just ended, the table below sets out performance by various asset classes / styles:

The rally that started in Q1 extended for much of Q2. Despite usual volatility around Central Bank rate action, investors largely came to terms with the idea rates would at least not be going up while the economy was headed for a soft landing. This was also reflected in Europe with inflation continuing its descent and the ECB (Central Bank) lowering rates by -0.25%. Investors also seem to be coming to terms with the idea that while core inflation would remain sticky, headline inflation – aided by lower energy costs – would keep coming down steadily. This gave rise to the recognition of a new type of goldilocks scenario which drove equities higher. There was a renewed surge in growth names especially helped by the usual technology names which, in turn, helped drive indices. Outside of growth, value and small cap suffered while the absence of any rate hikes also took its toll on REITs. By market cap, it was the large and mega caps that benefitted.

For a deeper dive, the chart below shows returns for a selection of major assets for June, Q2 and YTD to 30th June (all in US$). YTD, notable winners include Silver (+22.5%), Gold (+12.8%) and Copper (+12.9%). Oil (WTI) gained +13.8%. NASDAQ gained +18.6%, S&P 500 +15.3%. within this, the MAG-7 powered ahead +37.0% aided by NVIDIA which gained a stunning +149.5%.

More generally outside of these select assets over Q2, Asia (ex-Japan) and EM were the strongest performers with returns of over 7% and 5% respectively. The US (S&P 500) delivered over 4% with Japan and Europe returning 1.7% and 0.6% respectively. AI was – and continues to be – a dominant theme helping to boost tech names in Taiwan. Combined with cheap valuations and property support in China, Asia EM received a strong tailwind. It also highlights the dangers of lumping all Emerging Markets into one bucket. As pointed out above, EM Asia rose considerably more than the general EM sector – the latter dragged down by LATAM. The heightened volatility towards the very end of the month stemmed from profit-taking on tech names forcing indices to come off while in Europe the Far-Right made substantial gains in European Parliamentary elections. Left at that, markets would have absorbed this - but it was the shock announcement of legislative elections in France that caused European volatility to spike. The French equity market fell almost -6.5% in June and dragged the wider European indices! The spread between French Bonds and German Bonds widened +0.29% over Q2 – the biggest, quarterly jump since Q4 2011. Meanwhile, the UK performed well seeing as markets have fully accepted a Tory party wipeout, businesses vocally expressing a preference for the opposition Labour party and inflation continuing to fall. In the US while there has been a softening in data (sentiment, job market, manufacturing and services activity), the direction of rate action still points to the downside with a general view that there will be one to two rate cuts by year-end.

Outlook for Q3 2024

Once again, geopolitics rears its ugly head. While the uncertainties around Russia-Ukraine and Israel-Gaza persist, two more situations are creeping closer:

1. The reshaping of politics in Europe spearheaded by the French election.
2. The focus on the US election which has already begun with the first Biden vs Trump TV debate.

The question on most peoples’ minds is what impact recent European elections and the French election will have on Europe’s future. Overall, I think not much – though markets will be volatile. The Far-Right is a big enough bloc to be able to hold up legislation in the European Parliament. If Marine Le Pen’s party secures a victory (outright or more likely via an alliance), this will boost the Far-Right further. However, far from what is being suggested, it does not signify the end of the EU or the Euro. The EU has become a way of life for Europeans – freedom of movement, freedom of travel, freedom of trade, zero levies, equal rights, etc. Far-Right parties in the past (Marine Le Pen included) have failed in the past because of the fear around leaving the EU. As a result, they have had to change their stance significantly. Today’s Far-Right are more concerned with becoming stricter immigration relaxing green rules on the environment due to cost burdens and changes to human rights rules. Today’s Far-Right parties across many countries in the EU have had to modify their stance and move a bit closer to the Centre-Right while Centre-Right parties have had to take on right wing agendas. In essence, they are watered-down versions of the old Far-Right

parties of the 1970s. The EU - and the Euro - are safe and hopefully the EU will undergo some much-needed reform. They cannot afford to be fiscally and financially reckless – or else they will lose all reputation and go the way of Liz Truss’ government in the UK. Otherwise, bond markets will have the final say. The playbook to follow will be that of Georgia Meloni in Italy while Marine Le Pen will be eyeing the Presidential challenge in 2027. There is no room for error.

In the US, Trump has been delivered a major victory by the Supreme Court. In a 6 to 3 decision, they ruled Trump is entitled to absolute immunity from prosecution for official acts taken while in office – not for unofficial acts. This means the federal election interference case will return to a lower court which has to decide how to apply this ruling and how they can restructure the case against him. Until now, the trial was postponed pending this Supreme Court ruling. What does it mean for Trump? While he did not get the sweeping reforms he was after, it enables him to delay his trial until after November’s election……and if he wins the US election, it will be extremely challenging to go after him while in office. As things stand based on opinion polling, Trump is set to win against Biden. The first, live TV debate between the two was embarrassing and sad for Biden. It begs the question will the Democrats replace him with someone else in time for the election. That’s easier said than done – but they have little to lose. Financial backers for the party have openly stated they will withdraw support if Biden continues! And if Trump wins, what does it means? He is committed to lowering taxes, raising levies of Chinese goods even more aggressively than what has been seen so far, withdrawing US troops and support from conflict zones, taking a back seat on NATO and privately reaching a deal with Putin over Ukraine. His economic policies are viewed as inflationary by numerous economists while, in the meantime, the US budget deficit soars.

Q3 and H2 are going to be challenging, interesting and volatile. Fundamentals remain intact but will likely take a back seat even though they do appear attractive by both sector and region. Some points to note:

1. Technology, through AI, is in full flow. Much of it appears overvalued – even on a forward-looking basis. However, there are some significant differences between this dot.com boom and the last one (1999/2000). Companies are highly profitable and have considerable capital of their own to sustain themselves. The AI chipmakers are seeing year-on-year growth in the sale of their chips. Their true valuations come down entirely to how big the AI market can become…..and the latter comes down to how big the implementors (users) can take this. Robots are being developed almost daily. The tasks they are performing are so wide-ranging. Current forward projections are not looking beyond one year. The application, the more AI-chips you need. Markets value a stock based only on how far they can project. That projection is what’s going to change over the next two years.
2. Europe remains cheap and, despite recent events, the Euro has become cheaper. This presents a double, upside whammy. Europe harbours great, quality companies.
3. Emerging Markets are highly attractive for the same reasons as Europe. Recent elections in South Africa have led to a more proactive and business-friendly alliance while those in India have led to another BJP Alliance (albeit not the way Modi had hoped for).
4. Inflation continues to edge down. Energy remains in the low $80 price per barrel. From a consumer perspective, it’s encouraging that agricultural commodities continue to fall back. Corn was down over -10% (6th consecutive quarter). There were also declines in Soybeans (-3.4%) and Wheat (-1.2%).

As far as our portfolios go, there have been NO changes and there are no plans to do so just yet. How Q3 plays out will determine our next steps. They contain defensive qualities to them while they remain able to capture upside – as currently demonstrated. Our debt exposures are short duration which is where yield curves (bonds) offer the highest yields. If rates fall, these benefit the most. There is no point going longer duration given all the above commentary.

We thank you for your continued support. Please do not hesitate to contact us should you require any further insights into our thoughts and processes.