In the second edition of our new series of quarterly investment updates, read about all the latest news from the UK and global markets in 2024. And what a year it’s been so far!
Labour’s victory: A landslide, but not a smooth ride
Since our last investment update, the UK has witnessed a historic election, with voters decisively choosing Keir Starmer to end 14 years of Conservative leadership.
While this may have been a landslide victory, Starmer hasn’t been able to rest on his laurels in his first few months as Prime Minister. The win appears to be less about pro-Labour enthusiasm and more about an anti-Conservative sentiment, with Labour emerging as the natural alternative.
Since the election in July, the approval ratings for top Labour politicians have sharply declined. The Guardian reports that Starmer has dropped 45 points since the last poll on 19 July.
Source: Opinium (2024)
With the self-proclaimed “painful” Autumn Budget just around the corner, speculation is rife.
Labour has pledged not to raise the headline rates of Income Tax, National Insurance contributions (NICs) or VAT. However, other taxes appear to be in play. While we must reiterate that any potential changes are purely speculation, a few heavily rumoured possibilities have emerged:
- Inheritance Tax (IHT) could be an easy win for Labour, with only around 30,000 households paying this tax each year. Increasing house prices and frozen allowances, though, could see more people pay the tax in the coming years.
- Capital Gains Tax (CGT) – Starmer has ruled out the implementation of CGT on primary residence sales, but Labour could attack either the already diminished allowance or simply raise the rates.
- Pensions and ISAs are in the firing line. ISA benefits may be capped at a maximum of £100,000, while pensions may become subject to IHT upon death.
One thing is certain: this budget is set to ruffle some feathers.
US election: Harris v Trump
Since our last review, the presidential race has offered plenty of surprises. To kick off events in July, Biden withdrew from the race with Harris stepping in as the Democrat’s nominee for the White House. While this development would normally be enough excitement, it was only the first twist in this year’s most-watched political drama.
The summer saw two assassination attempts against former President Donald Trump. US bookmakers bumped up the odds of a Trump victory after the first failed attempt. However, Harris is now leading the Democratic charge and proving to be a formidable opponent.
Source: The Independent
As you can see, the latest polls show Harris pulling ahead of Trump.
Uncertainty triggers market volatility
As we moved into early August, the VIX index – often called Wall Street’s “Fear Gauge” and a key measure of market volatility – spiked, sparking global concern.
Source: Yahoo! Finance
Partly sparked by underwhelming jobs data in the US, the main catalyst was the Japanese and Asian markets. In July, the Bank of Japan raised its interest rates to the highest level since 2008, prompting monetary policy responses from the government and reducing the value of the yen against the dollar.
The combination of Japan’s rate hike, the weakening yen, and the US jobs report created a “perfect storm” that sent international markets tumbling. Fears of a US recession were short-lived. Markets quickly recovered and hit an all-time high on 18 September in the US.
Source: Timeline
The excitement of this quarter only strengthens the adage: it’s time in the market, not timing the market that counts.
Sustainable investing: Easier said than done
Sustainable investing has come under fire in recent years, from discussions about greenwashing and what really falls under the environmental, social, and governance (ESG) principles to the launch of the FCA’s Sustainability Disclosure Requirements (SDR). These issues are unlikely to disappear any time soon, so it’s worth considering where some of the key challenges lie.
SDR was introduced to help investors understand the realistic sustainability attributes of investments and help minimise the risk of greenwashing within portfolios. As assets in ESG funds surpass $30 trillion – with Bloomberg predicting they could reach $40 trillion by 2030 – the risk of greenwashing grows.
The new SDR rules aim to introduce four labels which, in theory, will help consumers distinguish between the various sustainability objectives of funds and investment products. The categories are:
- Sustainability Focus
- Sustainability Improvers
- Sustainability Impact
- Sustainability Mixed Goals
The FCA states that to use a label, at least 70% of underlying assets must meet the relevant criteria.
Recent delays to some SDR changes until 2025 highlight how difficult it will be to navigate this complex landscape. As time passes and the FCA continues to weigh its options, the path forward may become clearer. For now, ESG remains a topic of discontent in the industry.
Artificial Intelligence: Is the bubble going to burst?
Hardly a day goes by without AI making headlines or being discussed in boardrooms. It’s clear AI is here to stay but as the hype reaches fever pitch, it’s beginning to evoke memories of the dot-com bubble of 2000. Is the excitement around AI warranted, or might it be a bubble waiting to burst?
Over the past few years, technology has driven the performance of the S&P 500, with the “Magnificent Seven” leading the charge. None more so than Nvidia, the company that manufactures the computer chips used to power AI. As of June 2024, Nvidia is the largest contributor to the S&P 500’s return, accounting for 33%.
Source: Barker Boyer, Standard & Poor’s data
In early September the stock’s share price tumbled by 9.5% when the company’s quarterly forecast failed to meet the lofty expectations of investors.
AI is booming, as seen by the staggering number of patents being filed. However, there is a dark cloud overhead in the form of high concentration among the largest players in the AI field. This concentration risk is a real concern for investors, with the top 10% of companies in the sector controlling roughly 35% of the market share.
The important lesson of this story is diversification.
As AI becomes more widely adopted across sectors, there will be a widespread positive impact on company valuations. Even if investors are not directly invested in the AI sector, they will still benefit indirectly. The adoption of this advanced technology has not happened overnight and diversifying away from solely AI stocks will still provide investors with gains and exposure to AI.
Asset class returns Q3 2024
In Q3 2024, global financial markets saw mixed performance across asset classes, shaped by central bank policies, inflation concerns, and geopolitical tensions. While equities experienced heightened volatility, fixed income gained traction due to interest rate cuts. Despite concerns about inflation and geopolitical issues, stocks have shown resilience.
Source: Timeline
Global equity
In Q3 2024, global equity markets experienced heightened volatility, but unlike Q2, this volatility was largely driven by macroeconomic uncertainties. Nvidia, the global superstar of 2023, briefly became the largest company on earth, propelling US equity markets with its innovation-driven rise. The future remains uncertain, but for now, the equity show must go on.
In Europe, performance fluctuated. The market witnessed instability early in the quarter, largely due to mixed inflation data and concerns about future interest rate cuts. However, by September, optimism around the European Central Bank’s rate reductions pushed indices like the FTSE 100 and MSCI Europe higher.
In emerging markets, Chinese stocks remained under pressure, facing headwinds from both domestic and geopolitical issues. Indian equities, on the other hand, continued to show resilience, with the NIFTY 50 outperforming other emerging markets.
Fixed Income
The fixed-income market experienced notable shifts in the third quarter as central banks began implementing significant rate cuts across the board.
At the beginning of August, the Bank of England made its first rate cut since March 2020, reducing the benchmark rate from 5.25% to 5%. This move was a welcome sign indicating that inflation is more manageable than this time last year. It is expected to rise to 2.75% by the end of the year before returning to its 2% target in 2025. The chart below highlights the trajectory of inflation across various regions over the past few years, as well as predictions for where inflation may fall in 2025.
Source: Vanguard
In a major move, the US Federal Reserve slashed its benchmark interest rate by a full half percentage point, bringing it down to a range of 4.75% to 5%. This marks the Fed’s first cut since the pandemic era and signals the start of a new easing cycle, as the central bank aims to get ahead of any potential weakening in the U.S. economy and labour market. Predictions suggest that the US will hit the 2% inflation mark by the end of 2025.
United Kingdom
In the UK, the stage has been set for a dramatic political and economic shift. A landslide Labour victory has renewed optimism in UK markets.
With Labour’s promises of closer ties to the EU and a pro-business stance, there’s cautious optimism surrounding the UK’s FTSE 250 and smaller companies. However, given Labour’s historical tendency to raise corporate taxes and introduce regulations that could stifle entrepreneurship, the outlook remains uncertain.
In Q3 2024, UK equities maintained steady performance, with both the FTSE 100 and FTSE All-Share Index rising modestly. Despite ongoing global volatility, these indices gained approximately 2.5% during the quarter, driven by resilient corporate earnings and easing inflationary pressures. However, the Bank of England’s cautious stance on interest rates still weighed on sentiment. While improving macroeconomic conditions have helped buoy markets, including gradually declining inflation, investor confidence remains fragile, reflected by continued outflows from UK equity funds.
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