Q4 2024 Investment Update

Most markets ended the quarter with modestly positive returns (in their local currencies) with the notable exception of commodities.

Developed economies are now showing the lagged effects of monetary tightening, with evidence of economic momentum slowing, particularly in the employment data and most importantly inflation. This has allowed the Bank of England (BoE) and the US Federal Reserve (Fed) to follow the European Central Bank (ECB) in cutting interest rates. In fact, the Fed surprised the market with a “jumbo” rate cut of 0.5% rather than the usual 0.25%. The outlier remains the Bank of Japan which surprised the markets with an interest rate increase leading to a short-lived bout of volatility as the Yen Carry Trade was unwound. The Yen Carry Trade

The other notable economic news was the Chinese stimulus package which led to a sharp rebound in Chinese equities, which have been in a fully-fledged bear market having fallen c. 50% from their peak in February 2021. The jury is still out as to whether this will turn around China’s economic outlook.

Market expectations of growth have continued to flip flop throughout the year, with forecasters overreacting to each confirmatory or contradictory data point. A so-called “soft” economic landing, (a gentle slowdown but avoiding a recession), remains our central case and whilst it may not feel like it, we are in the fabled “goldilocks” (not too hot not too cold) scenario.

We cannot ignore politics and whilst the UK Budget looms large in our thinking it remains a largely domestic issue in market terms. More significant is the outcome of the US presidential election on the 5^th of November. Almost as important is the outcome of the congressional elections where a clean sweep (the House of Representatives and Senate is controlled by the same party as the new president) would give the incumbent much greater powers to pursue their economic agenda. At the moment the outlook for the presidential race and the House of Representatives is too close to call. It is also probable that we will not have immediate clarity, and this could lead to volatility.

There is heightened geopolitical tension in the middle east with the risk of Israel’s war with Hamas and Hezbollah spilling into a wider regional conflict with Iran and its proxies. However, the oil price which is the transmission mechanism to the global economy have remained largely unaffected by this turmoil.

There have been some notable and encouraging shifts in market leadership with the large technology stocks no longer leading market gains in the US and the US Dollar showing signs of weakness, particularly after the jumbo interest rate cut.

The economic outlook is probably benign and investor appetite and liquidity remains positive for most asset classes. The outlook for earnings has become less clear cut as economic activity is slowing down. We retain our slightly cautious stance having taken some profits in equities in September.