Q2 Global Market Insights from the Holden & Partners Investment Team
Introduction
Welcome to our quarterly market analysis, where we delve into the performance and significant events across various regions and asset classes. In this blog, we provide an overview of the economic landscape during the second quarter of 2024, highlighting key trends, developments, and market movements that shaped the financial markets.
Summary of Sections
US:
US equities rebounded strongly in Q2, driven by large tech stocks and positive earnings, while Treasury yields fell amidst softening economic data and expectations of interest rate cuts.
UK:
The UK market saw improved sentiment with inflation hitting the Bank of England’s target and increased M&A activity, though concerns remained around interest rate cuts and the general election.
Europe:
European markets stagnated due to political and economic uncertainties, with the European Central Bank cutting interest rates and a surge in far-right politics impacting investor confidence.
Asia and Emerging Markets:
Japanese equities faltered initially but recovered slightly, while emerging markets, led by Taiwan and China, outperformed developed markets despite ongoing challenges in China.
Alternatives:
Gold prices pulled back from all-time highs, and the S&P GSCI index remained relatively flat, with oil prices recovering towards the end of the quarter.
Sustainability:
Trade disputes between China and the EU escalated, and Denmark introduced pioneering environmental taxes on agricultural emissions, reflecting the ongoing global focus on sustainability.
Performance:
All portfolios showed positive returns despite volatility, with interest rate cuts being a central focus for investors as potential market changes loom on the horizon.
US
After a large pullback in April, largely fuelled by strong economic data and scaled back expectations of interest rate cuts, US equities finished the quarter strongly with the S&P 500 pushing close to a 4% return.1 This was largely driven by the continued strong performance of large tech stocks, with many of their earnings results over the quarter proving positive. Nvidia, Apple, Microsoft and Alphabet were all large contributors to the index’s performance. We are also starting to see more names in this sector offering income potential, with Alphabet and Meta announcing their first ever dividend payouts. While the yields on offer are still likely to be low relative to other value stocks, there may be potential for these payouts to grow over time along with their earnings.
Treasury yields fell from their April highs with help from softening economic data and a more hopeful outlook for interest rate cuts. The 10-year Treasury ended the quarter at around 4.4%,2 and US Treasuries were the only major sovereign market to finish with positive gains over the 3 months.3
UK
The sentiment in the UK saw some much-needed improvement in the second quarter. The headline inflation rate hit the Bank of England’s 2% target which was welcome news and Q1 GDP was revised ever-so-slightly from 0.6% to 0.7%.4 However, with a couple of concerning inflation data points – namely a stickier services figure at 5.7%, along with a general election and the need to avoid any speeches or public statements, meant that June’s decision was rather uneventful. The odds of an interest rate cut in August fell following this meeting, however July is a busy month for data so there is a lot to consider in the interim.
Merger and acquisition (M&A) activity picked up, with Hargreaves Lansdown, Anglo American, and Britvic being a few names that have been subject to M&A interest, all of which were among the best performers over the quarter, with the FTSE All-share returning 3.7%.5 While this highlights the relative cheapness of the UK market and attractiveness of some of the names, quality new listings are required to avoid any shrinking of the UK Market over the longer term.
Europe
European stock markets failed to carry their prior momentum into Q2, with political and economic uncertainty leading to a stagnant period. In an atypical move, the European Central Bank acted before the Federal Reserve, announcing an interest rate cut of 0.25% in early June,6 which came as inflation in the Eurozone began to stabilise (HICP).7 However, any confidence boost was suppressed by a far-right surge in the French European Parliamentary elections.8 Macron’s snap election call shortly after did little to quell concerns, with investors considering the consequences of a Eurosceptic, protectionist party gaining control of French parliament.9
This turbulence was on full display in European bond markets, with the French-German yield spread reaching as high as 0.85% post-election call. Yield spread is the difference in yield between two bonds – in this case French and German government bonds. This increase in the premium demanded by investors was indicative of nerves regarding the upcoming elections, with yields reaching their highest levels since November 2023 as the quarter came to an end.10 There were signs of a spillover into France’s neighbours, with the Italy-Germany yield spread widening.11
Asia and Emerging Markets
Japanese equities faltered at the beginning of Q2 in stark contrast to their first quarter fortunes. This was driven by unease amongst global stock investors around hawkish tones from the Federal Reserve, rising tensions in the Middle East and a large sell-off of semiconductor-related shares.12 The Nikkei 225 index at one point fell around 9% below its previous high, narrowly avoiding a technical correction. The remainder of the quarter saw the market begin to pick itself up again, with the index ending 0.43% down for the period.13
Emerging Markets showed well, with the MSCI Emerging Markets Index returning 5.1% on the quarter compared to 2.8% for the MSCI Developed Markets Index. The main driver of this growth was Taiwan, benefitting from the continued demand for AI microchips14 as the country’s biggest supplier, TSMC, ended the quarter over 50% up for the year to date.15 China enjoyed solid returns amid increasing exports, though economic growth rates were stifled by continued lack of consumer spending, a housing crisis and low economic activity, despite recent policy adjustments.16 Investor sentiment for the country remains low. India continued to benefit from this, with the SENSEX index reaching all-time highs17 as the India-China gap shrank further.18
Alternatives
Gold pulled back from all-time highs towards the end of the quarter, ending the period at $2,325.19 The trend of Central Bank buying continued from Q1, however, mixed data from the US over Q2 created uncertainty over future rate cuts, creating resistance for the precious metal.
The S&P GSCI, an index of physical commodities across the energy, agriculture and livestock, and metals industries remained relatively flat across the period, returning 0.65%.20 Oil prices, an important component within the index, recovered towards the end of the quarter on the increased expectations of a Federal Reserve rate cut in Q3, stimulating production and energy consumption
Sustainability
Trade disputes continued between China and the European Union, with the latter imposing additional provision tariffs of up to 37.6% on Chinese electric vehicle (EV) imports to the bloc. The EU’s automobile industry is at threat from cheaper Chinese imports of EVs, which benefit from lower production costs as a result of subsidies at various stages of production. If future agreements are not reached, we could see retaliation, with China already launching investigations into cognac and pork imports.
Denmark announced several plans aimed at tackling the environmental impact of the agricultural sector, one being a tax on livestock carbon dioxide emissions from 2030, making them the first country to do so. Being a large exporter of pork and dairy, agriculture is predicted to amount to 46% of emissions by 2030, with the tax estimated to slash 1.8 million tonnes of that in 2030.21 While this may pave the way for others to follow, it has understandably faced criticism, with New Zealand scrapping similar plans following push-back from farmers.
Performance
The second quarter of 2024 continues to show positive returns across all our portfolios however the volatility of this journey has not abated. April, a negative month across the board, was followed by a strong month in May and a relatively flat June. Interest rate cuts and when they might be are still dominating the mind’s eye of many investors.
For a second quarter in a row all our portfolios finished in positive territory with many of them beating their benchmarks. As the year progresses, we are looking at what potential changes we could and potentially should consider taking. At some point interest rate cuts will materialise and this will lead to a risk-on event and whilst we do not want to try and call the market, being prepared is important. As always, we continue to monitor the asset allocation of the portfolios and the investments that are the building blocks of these portfolios.
1 Morningstar S&P 500 PR GBP 01/04/2024 – 30/06/2024: 3.92%
2 https://tradingeconomics.com/united-states/government-bond-yield
5 Morningstar FTSE All-share NR GDP 01/04/2024 – 30/06/2024: 3.71%
6 https://www.lazardassetmanagement.com/research-insights/outlooks/european-outlook
7 https://data.ecb.europa.eu/data/datasets/ICP/
9 https://www.lazardassetmanagement.com/research-insights/outlooks/european-outlook
10 https://app.koyfin.com/chart-template/440e59a9-be88-4ac4-8b74-7fd01c1f442b/bn-txl3mn
13 https://app.koyfin.com/charts/gm/ec-5uzv0j
15 https://app.koyfin.com/charts/gm/eq-036rsh
17 https://app.koyfin.com/charts/gm/id-qaksb2
18 https://www.msci.com/documents/10199/c0db0a48-01f2-4ba9-ad01-226fd5678111
19 https://app.koyfin.com/charts/g/fx-faleqt?i=g
20 https://www.spglobal.com/spdji/en/indices/commodities/sp-gsci/?currency=USD&returntype=T-#overview
21 https://www.politico.eu/article/denmark-sets-first-carbon-tax-on-agriculture/