Q3 2024 Review & Q4 2024 Outlook

‍Market & Macro Review for Q3 2024

With Q3 just ended, the table below sets out performance by various asset classes / styles:

Q3 delivered good returns giving the perception of calm markets. This was simply not the case. The Quarter was characterised by three features: (1) Two main bouts of volatility – the first starting end of July and peaking first week of August and the second into September. Both had very little to do with fundamentals (more on this later); (2) The much-awaited Fed rate cut of -0.50%. The size of the rate cut alone signalled a strong message to markets - though it remains to be seen whether markets have understood the rationale behind it (again, more on this later) and (3) the substantial stimulus package in China.

Global REITs was the top performer delivering over +16% on the Quarter to stand at +21.5% for the year. This is no surprise given the interest rate sensitivity of this sector. The sector has been trading on very cheap valuations and there is an expectation amongst investors that this marks a turnaround. The latter is debatable given the still large and persistent property overhang. Rate cuts simply help to reduce the discountsto NAV – they do not eradicate them entirely; only an improvement in fundamentals can do that. Vast amounts of Office property remain at distressed levels. Sellers are still reluctant to sell – buyers are still bargain-hunting. Value and small cap sectors enjoyed a bounce as sector rotation continued from growth. In terms of highlights, consider the chart below:

The first bout of volatility was fuelled by incorrect perceptions around the US job market, specifically the weekly jobless numbers which had been rising. Economists became particularly concerned about a slowing job market and its potential implications of a recession. This resulted in a second bout of volatility in September, also related to jobs but specifically around job openings. In both cases, markets overlooked two sides of the equation – job layoffs/discharges remain as low as ever, implying companies are focused on retaining workers while reducing the emphasis on hiring (costly and time-consuming). Also, fears generated by recession talk likely meant fewer people were quitting their jobs, which led to less need for companies to hire!

Investigations into Nvidia for alleged antitrust violations by the DoJ and late filings by Super Micro sent jitters throughout the tech sector – explaining the substantial rotation from growth stocks into value.

• The rate cut was well-received and reverberated across all sectors. It was also a boost to Fixed Income markets, with the Barclays Global Aggregate index returning 7.0% in the quarter. Government and corporate bonds both fared very well, while EM bonds rallied over 6% in the quarter. There has been a marked shift in where markets perceive rates to land. At the end of Q2, they saw it at 4.4% by mid-2025. Now, it is expected to be 3.2%.
• The Chinese Central bank (PBoC) delivered a raft of stimulus packages (monetary, property and market-related) to shore up sentiment. Time will tell how this plays out, but it was quite a fillip. Chinese markets were up over 10% in one week alone! If this spreads to retail investors, an even bigger rise is in store.

Other Market Highlights And/Or Points Of Interest:

• As referenced above, Chinese markets performed very well. The Hang Seng is +30% (US$ terms), putting on almost +20% in Q3. The Shanghai Composite is up +16.7% YTD (also US$ terms), with nearly all of that coming in September.
• Tech was rather lacklustre by its own standards, with the Mag-7 gaining “only” +5.4% in the quarter. Contrast that with the S&P 500, which gained +5.9% over the same period – only a bit more than the Mag-7. The strong sector rotation alluded to above saw Utilities pile on +19.4%, becoming the best-performing sector.
• The Yen had its strongest quarter vs the US$ (since Q4 2008), gaining 12%, fuelled by a combination of rate hike talk in Japan and further rate cuts in the US. A lot of the Yen rally is driven by a reversal of the “carry trade,” which essentially happens when volatility spikes (risk-off). It has nothing to do with economic fundamentals – it’s entirely about underlying technicals. This is why the Yen is perceived as a “safe haven” FX.
• True safe haven assets, such as Gold, gained over 13% in US$ terms, its strongest quarter since Q1 2016 as markets priced in faster rate cuts.
• The real surprise is Oil (Brent and Crude), which has declined over the month, the quarter, and YTD. This has been a huge reason for the decline in headline inflation and the slower decline in core inflation.

Summarising Q3:

• We have had a lot of noise, which has resulted in 'sell the rumour and subsequently buy the fact' around the misinformation and misinterpretation of data, especially jobs data!
• We have witnessed the start of rate cuts – sizeable ones in the US and China. Rate cuts have not been limited to just these two nations – the Euro-area has also cut its rates.
• Economic activity remains mixed: services activity in developed countries remains in expansion (i.e. over 50), while manufacturing (a smaller component of their economies) remains in contraction (less than 50 but not massively so).
• Headline inflation continues its downward trend, aided strongly by falling fuel costs. There is a real chance these lower fuel costs could come back to spur headline inflation.
• Retail spending remains well-buoyed, as do consumer savings ratios.
• The main concern is the rise in geopolitical risk. Even at the time of writing, the Middle East has erupted again, with Israel bombing sites in Lebanon (Hezbollah targets) and eliminating the Hezbollah leadership, now targeting Iran following the latter’s missile attack on 1st October.

Outlook for Q4 2024

The following factors will be key during Q4 and define market trajectory:

Geopolitics:

As referenced in the last point on the page before, how far the Middle East escalates will determine geopolitical risk and subsequently energy prices. The latter, in turn, will drive inflation. Iran produces almost 4 million barrels of oil per day (mbpd), accounting for about 4% of global production. Given several cuts in production by OPEC recently, this shortfall could be absorbed (to the delight of other oil producers) for a higher price. Oil prices have tumbled, and crude prices sit in the low-$70 range. The likes of Saudi Arabia need an oil price closer to $100 per barrel to break even on its domestic budget. Even given the current flare-up in the Middle East, it’s hard to see oil reaching such heights. It would take something far wider—such as blocking off the Straits of Hormuz—to cause contagion. It’s not impossible!

Interest Rates:

Why did the Fed cut so aggressively? The US economy has not displayed signs of weakness that warrant such an aggressive cut (some would say any rate cut at all!). Furthermore, the consumer savings and investment ratio remain healthy, as does retail spending. There is no imminent risk to the mortgage market, with the overall weighted-average mortgage rate still low (albeit higher compared to a year ago). So why did the Fed go so deep? I think the answer rests in next year’s maturing global corporate debt wall, which peaks into 2026.

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Two things to note: the US dominates (though Europe is not far behind) and the non-Investment Grade (IG) portion rises materially. Now look specifically at the US corporate maturity wall breakdown:

If US companies had to refinance at today’s loan rates, they would suffer higher loan rates in the order of 2% (the exact amount is hard to say as there would be some mitigation from things like interest rate hedging). This higher level—which affects the non-IG companies even more—would result in cost savings, which typically come from shedding labour and reduced investment. If this were to happen, then there really would be a labour market problem and inflation would loom! If correct, the Fed needs to cut by somewhere between 1.5% to 2.0% between now and, say, the middle of 2025. It has already done 0.50% of this! Time will tell, but rate cutting now far exceeds rate hiking around the globe.

US Election:

It’s going to be a very tight race. VP Harris has narrowed the gap and, depending on which poll one looks at, leads over Trump. Some suggest she even has a very narrow lead in the critical swing states. ALL polls and their findings are well within the margin of error depending on the pollster and the state in question.

Two factors distinguish the candidates: VP Harris wants to provide a big boost to housing by offering $25,000 assistance in down payments for people to buy homes; Former President Trump wants to cut inflation by effectively flooding the market with cheap oil. The former often results in a housing bubble, while the latter is inflationary (services inflation). Both should raise GDP. The bigger impact will be foreign policy and (re)shaping geopolitics—not just towards the Middle East, but also China and Russia.

Europe:

The European political landscape has changed. The recent Parliamentary elections have given rise to a large Far-Right vote (Italy, France, Germany, Poland, Holland). Together, they account for about one-third of the Parliamentary makeup, significantly higher compared to the previous, outgoing Parliament.

More recently in Germany, two major state elections saw the Far-Right (the AfD) win in Thuringia and come a close second in Saxony. Things look very bleak for the coalition government of the centre-right. Generally, these Far-Right groups have a softer stance towards Putin, Russia’s position on Ukraine, and are more resistant towards the EU as it currently stands. The latter does not mean the EU is set to implode—just that it’s headed for a major restructuring.

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Disclaimer
The opinions and interpretations of the market and economy are solely the opinion of the author of this article. This information is provided to you as a resource for educational purposes only and should not be considered investment advice or recommendation. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax, or investment advisor before making any investment/tax/estate/ financial planning considerations or decisions. There are no guarantees of investment performance. Past performance is no guarantee of future results.