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The global equity markets in September delivered mixed outcomes, influenced by various economic developments across key regions. Interest rate decisions, particularly in the US, played a pivotal role in driving market returns. The Federal Reserve surprised investors by cutting interest rates by 50 basis points—double what many had expected. This proactive move was aimed at countering potential economic weakness. The lower borrowing costs resulted in the US equity market hitting new highs. The question remains whether inflation is fully under control or whether we may see this re-emerge going forward.

Outside the US, China’s economic landscape was another key driver of market activity. Beijing announced an aggressive stimulus package designed to revive its property market and boost consumer confidence. This led to a sharp rally in Chinese stocks, with the Shanghai Composite surging by nearly 16%. However, long-term concerns remain regarding the structural issues in China’s property sector, and if these measures really address the underlying problems.

Commodity markets reacted positively to China’s stimulus, with metals and materials rallying. However, oil prices remained subdued, reflecting weaker global demand. This had a negative impact on the UK equity market, as the FTSE 100 (the biggest listed companies in the UK stock market), has a significant exposure to the energy/oil sector. The UK equity market posted a negative return for the month and underperformed many other developed equity markets.

In Europe, business surveys in September pointed to continued economic difficulties. The Purchasing Managers’ Index (PMI) measures economic activity, and a reading below 50 indicates contraction. The latest reading from the Eurozone was 47.1, firmly indicating the region continues to shrink in terms of economic output.  Official data published on the UK economy also showed the economy shrank. The positive take on this weaker data, is that central banks in the UK and Europe have scope to cut interest rates further.

Inflation continues to decline in both Europe and the UK. Headline inflation in Europe fell to 4.3% and headline inflation in the UK marginally declined to 6.7%. However, core inflation in the UK declined much sharper than expected to 6.2%.  This enabled the European Central Bank (ECB) to cut interest rates to 4%. The Bank of England (BoE) retained interest rates at 5%, but the BoE governor, Andrew Bailey, indicated further interest rates cuts were certainly an option going forward. With inflation declining and interest rate cuts in both the US and Europe, bond markets posted mixed returns – government bonds were slightly negative, while global corporate bonds were the standout in the fixed income asset class delivering a positive return of +1.8%. Lower borrowing costs should help improve corporate profitability.

On the back of the surprise stimulus package within China, the Asian and emerging market equity regions were the best performing over the month, delivering +5.2% and +4.9% returns respectively.  The UK and European posted negative returns of -1.4% and -1.2% respectively on the back of weaker economic data.

Meanwhile, gold continued its strong performance, benefiting from its role as a “safe haven” asset amid falling interest rates, a weaker US dollar, and heightened geopolitical risks. In contrast, oil prices remained subdued despite China’s stimulus, which helped keep global inflation in check—a positive development for many asset classes.

As many investors headed off on holiday, August presented global markets with a much more turbulent environment, spurred primarily by concerns over a slowing of economic growth in the US. As the month progressed, fears eased, buoyed by more stable economic data and assurances from central banks, particularly the US Federal Reserve. By the end of August, much of the earlier losses had been recovered, allowing equity markets to regain their footing.

Periods of volatility are not unusual in financial markets, but August’s volatility was striking. Global equities saw sharp declines early in the month, as investors grew increasingly uneasy over the resilience of the job market in the US and several large technology businesses that have invested heavily into Artificial Intelligence, but with very little to show for it. Circumstances were further compounded news from Japan of the Bank of Japan’s decision to increase interest rates from 0.1% to 0.25%. This modest increase had outsized consequences, as for many years investors have used Japan as a source of cheap finance: borrowing money in Japan (where interest rates have been very low) and investing it elsewhere (such as the US), in the expectation of achieving much better returns. With higher interest rates in Japan pushing up the cost of borrowing and the opportunity for investors in the US looking a bit shaky, investors began head for the exit. This sudden reversal led to significant selling of Japanese equities, which plummeted as much as 20% before beginning to recover. Investors who had previously benefited from Japan’s low interest rate environment were caught off guard, triggering a wave of volatility across other regions.

While the US grappled with volatility, other markets displayed more resilience. European and UK equities posted gains in August, supported by the belief that the European Central Bank (ECB) would cut rates to counter weak economic data. Despite disappointing corporate earnings from Germany, particularly in its industrial sectors, investors interpreted this as a precursor to further ECB intervention. European equities closed the month of August in positive territory, reflecting investor optimism around the possibility of rate cuts. We have subsequently seen a 0.25% reduction in interest rates from the ECB. In the UK, the FTSE 100 edged closer to record highs, underpinned by strong corporate earnings. However, a stronger pound and weakness in some energy and mining stocks tempered gains.

Amid the turbulence in equity markets, bonds proved a safe harbour, providing much-needed stability to diversified portfolios. US Treasuries performed well, benefiting from growing expectations that the Federal Reserve would begin to lower interest rates. Those expectations came to fruition with a 0.5% interest rate cut after month end. High quality corporate bonds also gained ground, as investors sought refuge from equity market volatility.

Bonds remain a crucial component of portfolios, particularly during periods of economic uncertainty. The promise of more support from central banks further bolsters the outlook for bonds. Should economic growth slow more than anticipated, bonds, especially those of higher credit quality, may benefit from falling interest rates and remain an attractive option for investors seeking stability. While inflation remains a persistent concern, the income generated from bonds has become increasingly appealing, especially as other asset classes experience heightened volatility.

Looking ahead, market participants will continue to focus on central bank policies and geopolitical developments, including the US presidential election and tensions in the Middle East, both of which could have far-reaching effects on financial markets. While uncertainty remains, the underlying picture is cautiously optimistic, with easing inflation and the potential for further interest rate cuts offering support to both equities and bonds as we move towards the end of the year.

The UK stock market struggled during June, despite good news on the economy. The headline inflation figure fell to 2% in May, helped by a slowdown in food and drink inflation. The Bank of England decided to hold interest rates for the time being, but an interest rate cut in August is a distinct possibility, if the BoE has enough evidence for it to think that inflation won’t tear away again. Consumer confidence continues to rise in the UK, supporting a more positive outlook.

In aggregate the US stock market continued its inexorable rise this month, with the main index up over 5% in June, and over 16% so far this year. Enthusiasm for Artificial Intelligence as an investment theme continued to drive share prices in technology, although other sectors such as utilities and materials were much weaker by contrast. The US economy continues to grow with a strong outlook in both services and the manufacturing parts of the economy. Job creation also remains strong, but unemployment has risen a little more than expected, to 4%.  With inflation coming down in line with expectations, the Fed has begun to look ahead to when it might reduce interest rates from the current level (5.5%). The timing of a rate cut could be swayed by which candidate is successful in the US election. While neither of the main parties are likely to rein in spending, the Republican party may be more aggressive in its plans to cut taxes and this could factor in the Fed’s decision. The contest for the White House has been finely balanced but the debate between Mr Biden and Mr Trump at the end of June raised concerns over Mr Biden’s capacity to continue in the role for another term. Polls following the debate saw an acceleration in support for Mr Trump, which we suspect will have intensified following the dramatic events in Pennsylvania.

In bonds, government bonds delivered positive returns in June on the back of interest rate cuts from some central banks (Canada and Europe) with cuts expected later year from others (US and UK). Bond markets do not currently have ambitious expectations for rate cuts this year (cuts are typically good news for the performance of bonds) and consequently we think that this should pave the way for positive returns from the asset class in the second half of the year. Returns were also positive from corporate bonds, although we continue to see that in some parts of the market, government bonds may offer better value. In portfolios, a blend of government and corporate bonds looks to offer a good balance for investors at the moment.

Elections in Europe have generated some volatility in both equity and bond markets during June. EU elections saw far-right parties gain seats from liberal and left-leaning parties, with the uncertainty compounded in France where President Macron unexpectedly called an election. As Europe moves past peak election season, political clarity should help to stabilise markets as investors wait to see improvements in the economic data.

Despite the uncertainty that elections create, history tells us that over the long term, they have only a minor influence on investment returns.

May proved to be a decent month for both equity and bond market returns which were boosted by improving economic conditions coupled with anticipation of interest rate cuts by the Bank of England (BOE) and the Federal Reserve (FED) later this year.  There were some exceptions with small losses in Japanese equities and Global Government bonds however most of this was attributed to currency moves as Sterling rallied against most other developed currencies.

Within equities, both the UK and US large cap companies hit all-time highs during May.  The UK market has led the charge over the last 3-months posting gains of 9.5% and has also seen further broadening out of returns with small caps now outpacing large caps on a year-to-date basis.   The UK economy expanded by 0.6% over the first quarter of this year, surpassing expectations and marking the fastest growth in two years.  Despite upcoming UK elections on July 4th, the market seems relatively unphased about the possibility of a leadership change given the recent advance of sterling.  European stocks also performed well posting gains of 2.5% over the month.  This was driven by improvements in economic activity with signs of recovery in both the services and manufacturing sectors as well as corporate earnings exceeding expectations.  Both Japan and Emerging Markets posted small gains in local currency terms however this was more than offset by currency moves resulting in small losses in GBP terms.

There has been a significant shift in terms of expectations around the trajectory of inflation and monetary policy across regions.  At the end of 2023, markets were expecting the US to be a ‘first mover’ in terms of interest rate cuts and had priced in as many as 5-6 cuts throughout 2024.  Fast forward to today, the European Central Bank (ECB) have led the charge cutting rates by 0.25% on June 6th.  In the UK, headline inflation (CPI) has fallen near the Central Bank’s target of 2% however service and wage inflation remain stubbornly high at around 6% creating some uncertainty as to when the BOE will be able to cut rates.  Conversely, the chances of an imminent rate cut in the US appear to be fading with expectations of perhaps one rate cut later this year.  This uncertainty around the path of interest rates is likely to remain a source of volatility for government bond markets over the near term.  The big picture is that inflation is in a much better place than it was a year ago. We should not lose sight of this fact.

We have seen a positive start to the year for equity markets, but the road ahead will likely be bumpy as we navigate macroeconomic and geopolitical pitfalls. In any case, we are encouraged by the fact that economic activity is improving, and inflation levels are at a more manageable level then they were at their peak 18-months ago.  As always, this should present some interesting investment opportunities over the medium to long term.

After interest rates peaked in November 2023, investors began to eagerly anticipate the point at which the Bank of England, the Fed and their counterparts would consider the battle against inflation won and begin to cut interest rates. Their eagerness drove markets up in a fierce rally at the end of the year, but as central banks have been much slower in taking action, markets have been back pedalling for much of 2024. Although in April UK equities were an exception, with Asia and emerging markets equities also making gains.

There was a pullback in the US stock market, which fell nearly 2% over the month. Inflation has not fallen as fast as expected and dampened hopes of near-term interest rate cuts. The consumer price index (CPI) for March ticked up, bringing the annual reading to 3.5% from 3.2% in the previous month.  The rise in inflation and strong jobs market data, pushed back the markets expectation of when the Fed would look to start cutting rates. Earlier in the year there had been high expectation of around six interest rate cuts this year. This euphoria has dwindled to maybe one or two rate cuts. Inflation numbers, however, do look much healthier than a year ago, but equity markets are looking for lower interest rates to push higher and are instead ebbing and flowing according to the latest musings of Fed chairman Jerome Powell. With the US making up approximately 70% of the global equity market, it’s no surprise global equities also declined, but Europe and Japan were weak performers too. In the case of Japan, a weak yen has been the headwind, but we expect this to recover as interest rates in the US eventually start to come down. The performance of Japanese businesses has not been an issue and their earnings have remained strong.

The standout market for the month was the UK which bucked the trend and delivered over a 3% positive return. Whereas in previous months it has all been about the US and the technology sector, April saw a return to less fashionable areas of the market such as financials and resources, which make up a significant component of the large cap UK index (the FTSE 100). The excitement was not contained to the largest companies. We also saw an increase in overseas buyers swooping to snap up UK businesses, which drove positive returns further down the market cap spectrum. With many businesses in this part of the markets delivering strong earnings that are not fully reflected in their share prices, interest from foreign acquirers seems likely to continue for some time.

Emerging markets also delivered a positive return, on the back of a rebound in China’s economy. The recent growth figures were better than expected, showing a 5.3% improvement, suggesting that policy support may be starting to have the desired effect. It has been a long path for the Chinese economy over the last few years. It may now have found a bottom. If that proves to be the case, investors may start to return to the market again, which would be a powerful driver for returns.

Slow to materialise interest rate cuts have been a headwind to other asset classes too, with property, infrastructure and bond markets also waiting for good news. As a result, bond markets were weak in April. The narrative of “higher for longer” interest rates to bring inflation back down to central banks’ 2% target level had a negative impact on all parts of the bond market: government debt, corporate bonds, high yield and emerging markets. Uncertainty over when the promised cuts will emerge has caused some volatility. The big picture is that inflation is in a much better place than it was 12 months ago (we should not lose sight of this) and that bonds are offering an attractive level of return at the moment.