Quarterly Investment Update
The following Quarterly Investment Update is courtesy of M&G Investments
We continue to have a positive outlook for 2024.
Equity markets continued to rise in Q2 2024, but China and the broader Asia region led the way rather than US equities.
Elections in France and the UK have had contrasting outcomes. With a big political swing in the UK to a labour majority, we don’t think this will significantly impact markets.
In France, the outcome of Macron’s gamble for fresh National Assembly elections has complicated French politics; no one party has enough votes to govern, and a messy collation between his centrist party and the left-wing Popular Front now appears most likely.
These shifts may matter in time, but we’re staying focused on company earnings and economic growth.
What moved markets in Q2 2024
The Quarterly Investment Update showed that global stocks rose 2.86% in Q2. US shares posted strong gains, supported by strong corporate earnings from large technology businesses.
Eurozone stocks were higher; real estate and utilities sectors were among the top performers. These sectors are more sensitive to changes in interest rates.
In June, the European Central Bank reduced interest rates from 4% to 3.75% per annum (pa), taking action before the US Federal Reserve and the Bank of England.
Emerging and Asia markets outperformed developed stock markets. Better-than-expected growth data in China made investors more optimistic about Chinese stocks.
The Taiwan stock market also performed strongly. Taiwan is home to one of the largest semiconductor makers in the world, which provides the chips used in artificial intelligence (AI) technologies.
Resurgent UK Equities
Elsewhere, the Quarterly Investment Update showed the FTSE 100 Index rose over the period and hit an all-time high.
The market was supported by UK economic growth, which was higher than expected as consumers increased their spending.
In May, the UK inflation rate fell to the Bank of England’s target of 2% for the first time since July 2021. This gave investors hope that the central bank would cut interest rates sooner than expected.
Returns were boosted by offers to buy UK companies; the shares of companies listed on the UK market are less expensive than other regions, making them a target for private or overseas firms to purchase at a ‘cheap’ price.
While this has helped short-term returns, it could reduce the number of companies listed on UK stock exchanges in the longer term.
The Quarterly Investment Update showed that Japanese companies are buying.
Japan’s stock rose 1.75% when measured in Japanese Yen but lagged other markets over the quarter.
While Japan’s stock market was buoyant, the Japanese yen fell against the British Pound. This led to a negative return of -4.33% for UK investors who held Japanese equities over the quarter.
The Japanese economy shrunk by more than expected in Q1.
An increasing number of companies announced their commitment to the Tokyo Stock Exchange’s initiatives, which focus on ensuring they use resources efficiently and in a way that benefits the shareholders. This has led to a record-high amount of share ‘buybacks’ in Japan.
A buyback is when a company buys equity shares from current holders and makes them available overall. It can boost the share price in the long run, as each shareholder owns a higher percentage of the company.
Elections everywhere
The Quarterly Investment Update showed that election outcomes and political risks were front and centre over the past month, with surprising election results in Europe, Mexico and India. France and the UK also held elections in early July. The US election is set for November 2024. Our view is that the economy drives returns in equities and bonds.
The Labour victory has marked a substantial political swing, but we don’t expect major changes in the near term in terms of the impact on markets.
The campaign revealed few policy changes; Labour’s priority is to grow the economy while emphasising fiscal prudence.
They’re inheriting an economy showing signs of rebounding; GDP growth has moved off the floor in Q1, inflation is falling back to target, and the Bank of England is eager to cut interest rates – both of which can help support consumption.
Overall, the change in government and a large majority should bring political stability and increase household and business confidence. This would help support the recovery in the UK economy; however, we don’t see enough recovery yet to allocate more to UK domestic businesses.
The views expressed here are subject to change without notice. Neither M&G Wealth Investments, or any of its associates, director, or employee accepts any liability for any loss arising directly or indirectly from any use of this document. We can’t predict the future; past performance isn’t a guide to future performance. The value of your investment can go down as well
as up so you might get back less than you put in.
