Quarterly Market Report Q2 2024

Overview

Despite a turbulent beginning to the quarter, financial markets in the U.S. swiftly adjusted to a ‘no-recession soft landing’ scenario, as reflected in the optimistic earnings growth expectations and the levels of defaults priced into high-yield credit spreads. Conversely, mixed data signals, particularly concerning inflation and labour markets, have postponed the timing and extent of potential rate cut cycles from several major central banks. We maintain the belief that markets remain highly vulnerable to the risk of a harder landing or recession in late 2024 or early 2025. Thus, we remain relatively defensive in our positioning, recognising the potential for material returns if soft-landing expectations materialise, but also the risk of significant drawdown should a recession ensue.

All London Tyne portfolios continued to make positive gains in Q2 2024.

London Tyne Cautious returned 1.60%, outperforming its benchmark over the quarter

which returned 0.63%.

London Tyne Balanced returned 1.85%, outperforming its benchmark over the quarter

which returned 1.14%.

London Tyne Opportunistic returned 1.49%, underperforming its benchmark over the

quarter which returned 1.67%.

YTD

Year-to-date (YTD) all portfolios continue to perform well.

London Tyne Cautious returned 6.4%, outperforming its benchmark which returned

2.14%.

London Tyne Balanced returned 7.17%, outperforming its benchmark which returned

3.65%.

London Tyne Opportunistic returned 9.14%, outperforming its benchmark which

returned 5.91%.

Returns Disclosure & Disclaimer

Figures refer to both simulated and model past performance and that past performance is not a reliable indicator of future performance. Returns are net of holdings’ management fees and expenses based on the cheapest share class available; however they do not include the fees charged by the manager (estimated to be 0.35% per annum), the adviser or the Platform. Returns are calculated assuming a single trading date in relation to any changes to underlying holdings which will not necessarily be the date that actual platform transactions occurred. Therefore, platform performance may vary from actual performance. For periods longer than one year, cumulative performance has not been annualised. Movement in exchange rates may affect the value of some underlying investments

US

In Q2, U.S. stocks rose, driven by the information technology and communication services sectors. AI-related companies like Nvidia, Microsoft, and Apple performed strongly, contributing to a 6.4% return for global growth stocks. Despite a dip of the S&P 500 in April due to high inflation fears, softer May inflation data and robust Q1 earnings led to a 4.3% quarterly gain.

The U.S. economy expanded 1.4% in Q1, with consumer spending slowing and retail sales flat in April. The labour market headline figures remained strong, adding 272,000 jobs in May although the caveat is that a significant portion is due to Government hiring. Moreover, the overall impact of this has been further dampened by downward revisions. In the financial sector, several banks announced dividend increases after passing the Fed’s annual stress tests. Market focus was on potential interest rate cuts, with the Fed indicating just one cut this year.

The potential timing and scale of interest rate cuts captured market attention throughout the quarter. Initially, fears of an overheating U.S. economy and robust economic data were met with market anxiety. However, optimism for a soft landing increased as the quarter advanced. The latest Fed “dot plot,” outlining policymakers’ rate forecasts, suggested only one rate cut this year.

Equity markets stayed resilient amid bond market volatility, supported by a 7.9% year-over-year increase in Q1 EPS. S&P 500 earnings growth is now less reliant on the “Magnificent 7” driven by information technology and communication services, while energy and financials detracted. Inflation, measured by the personal consumption expenditures index, slightly decreased to 2.6% in May from 2.7% in April. U.S. economic data softened over the quarter, falling below consensus expectations since early May.

UK

UK equities gained, with the FTSE 100 hitting new all-time highs, buoyed by a mix of better economic performance, easing inflation, and anticipated interest rate cuts. Consequently, these gains were partially reversed towards the end of the quarter as the market tempered its expectations for imminent rate cuts. The UK FTSE All-Share Index closed out the quarter with a return of 3.7%.

The UK economy rebounded strongly in the first quarter of 2024, growing by 0.7% after a mild recession in the latter half of 2023. This marked the fastest quarterly growth since 2021. Despite this, recent data showed stagnation in April, with the unemployment rate rising to 4.4% and the economy shedding 140,000 jobs. In contrast, annual consumer price index (CPI) inflation dropped to 2.0% in May, reaching the Bank of England’s target for the first time since July 2021.

Despite these positive inflation trends, the Bank of England (BoE) maintained base interest rates at 5.25%, a 16-year high. This decision was driven by concerns that the decline in inflation might be temporary, especially given the persistent high wage inflation, which pushed services inflation to 5.7% in May.

Former Prime Minister Rishi Sunak also announced a snap general election for 4 July, a move that had little immediate impact on markets.

Europe ex-UK

Eurozone shares retreated in Q2. Equities fell amid uncertainty caused by the announcement of parliamentary elections in France and dwindling expectations for steep interest rate cuts.

The information technology sector gained with semiconductor-related stocks posting significant gains. The consumer discretionary sector saw declines amid weakness in automotive and luxury goods stocks.

The European Central Bank cut interest rates by 25 basis points in early June. The scope for further cuts may be limited by sticky inflation. Annual inflation in the euro area was 2.6% in May, up from 2.4% in April.

Forward-looking data pointed to a slowdown in the eurozone’s economic recovery. The flash HCOB composite purchasing managers’ index dipped to 50.9 in June from 52.2 in May. PMI data is based on surveys of companies in the manufacturing and service sectors. The Euro Area manufacturing PMI is significantly weighing on the composite with the latest reading in June of 45.8. Whereas, the Euro Area services PMI boosted the composite with a reading of 52.8. A reading above 50 indicates growth while below 50 indicates contraction.

Politics was a key focus in the quarter. European parliamentary elections saw gains for right-wing nationalist parties. This was notably the case in France and President Macron responded by calling parliamentary elections, in a move that surprised markets and saw French equities underperform the broader eurozone index.

Emerging Markets

Emerging market (EM) equities outpaced developed peers, rising 5.1%, thanks to weaker US macro data easing interest rate concerns and a rebound in China. Chinese initiatives to strengthen the real estate sector, combined with strong performance from AI-focused Taiwanese stocks and the significant influence of Asian markets in the emerging market index, contributed to a 5.1% return on emerging market equities. This is particularly notable given the weaker performance in Latin America, highlighting the relative strength of Asia within the broader emerging market landscape.

Turkey led the quarter, buoyed by stable economic policies, the MSCI Turkey Index returned 22.99%, while Taiwan saw a double-digit gain due to tech stock enthusiasm. South Africa and India also performed well, benefitting from positive political developments. Emerging European markets flourished, with China’s recovery boosting their performance. Contrast, Brazil and Mexico lagged, with issues like cautious central bank policies and political uncertainties impacting returns.

China

China faces significant long-term structural issues, such as high savings rates, low consumption, a struggling real estate market, overcapacity, and a heavy reliance on export demand. Recent policy measures have improved the near-term outlook and helped Chinese shares recover from being deeply oversold earlier in the year. Although exports and imports rebounded in April, signalling stronger global and domestic demand, new US tariffs on Chinese electric vehicles (EVs), advanced batteries, solar cells, and other goods have heightened trade tensions due to perceived dumping. Geopolitical risks remain on the horizon as tensions with the U.S. could escalate leading up to the November Presidential election. Additionally, the European Union might take a more aggressive stance in response to the significant increase in electric vehicle exports to Europe.

Despite these challenges, China also saw significant gains, as low valuations enticed cautious investors back into the market.

Chinese stocks benefited from a shift in focus towards high-tech industries, including electric vehicles, spurred by government investment aimed at capitalising on global demand and navigating protectionist trends from the U.S. and Europe. Despite this, investor caution remains due to geopolitical risks and an ongoing real estate downturn impacting consumer confidence.

The MSCI China index returned 7.02% over the quarter.

Japan

The Japanese yen experienced significant currency weakness due to wide interest rate differentials. The BOJ announced plans to reduce the amount of JGB purchases starting in July. Although, these measures were insufficient to reverse the yen’s downward trajectory. Real wage growth has remained negative which has had a dampening effect on domestic consumer sentiment.

Consequently, the weaker currency has been a boon for Japanese markets due to increased foreign spending. Japanese companies ended the quarter with earnings above expectations leading to improved corporate profitability, albeit with lower forward guidance. The Japanese TOPIX index ended the quarter with a return of 1.7%.

Asia ex-Japan

In the second quarter, Asia ex-Japan equities experienced strong gains, with Taiwan, India, and Singapore leading the charge. Taiwan, driven by excitement over artificial intelligence (AI) stocks, emerged as the standout performer, not only for the quarter but also for the year-to-date.

India’s stock market also performed robustly, reaching record highs by quarter’s end, fuelled by positive sentiment and gains in the media and banking sectors. On the other hand, the quarter was less favourable for Indonesia, the Philippines, and Thailand, which lagged. Hong Kong’s market was relatively flat, while South Korean stocks saw a modest decline due to increased global economic uncertainty and speculation about U.S. interest rate cuts.

Australia

In Australia, the economy continued to slow, recording growth of just 0.1% for the latest quarter. Employment markets remain tight, but unemployment is gradually rising in line with the RBA’s current strategy of sustainable full-employment. Lower-income households are most affected by restrictive financial conditions, resulting in weak consumer confidence, consumption, and retail spending. While inflationary pressures are declining, they remain prevalent in many service-based sectors, compelling the RBA to maintain the cash rate at 4.35%. The direction of the cash rate in the next period remains uncertain, with both a hike and a cut still on the table.

The ASX 200, heavily weighted with financials and materials, comprises approximately 30% and 21% of these sectors, respectively. Financials have stabilised the Australian index over the quarter due to the prospect of rising rates, which helps reduce margin pressures. In contrast, materials have dragged on the index, primarily due to falling iron prices affecting their large miners caused by the well-known Chinese property concerns and will likely remain sensitive to further Chinese policy.

Commodities

The S&P GSCI Index posted a modest increase in the second quarter. The strongest performers were industrial metals and precious metals, while agriculture lagged.

Zinc prices saw a sharp rise within the industrial metals sector. In the precious metals category, silver experienced substantial gains, though gold’s price increase was more restrained.

The energy sector also recorded a modest gain for the quarter, bolstered by a strong price increase in natural gas. In agriculture, despite a notable rise in coffee prices, declines in the prices of cotton, corn, cocoa, and sugar overshadowed the gains.

Fixed Income

The second quarter of 2024 began poorly for global bond markets in April due to renewed US inflation concerns, driven by hotter-than-expected CPI, ISM, and employment data. Inflation rose to 3.4% in the 12 months to April before dipping slightly to 3.3% in May, still well above the Fed’s 2% target. Consequently, 10-year U.S. Treasuries peaked at 4.7%. In May, government bond yields declined as weaker inflation spurred hopes for earlier rate cuts. This indicated a postponed rate cutting cycle, with markets now pricing in just one rate cut this year—significantly fewer than expected in Q1.

Political risks led to specific weaknesses in emerging markets and Europe in particular, although the upcoming UK election had minimal impact. The Bloomberg Fixed Income Global Aggregate Index fell by 1.7% over Q2.

Investment-grade corporate bond markets in the US and Europe delivered positive absolute and relative returns compared to government bonds, benefitting from relatively higher income as credit spreads tightened during the quarter. High yield markets had another strong quarter, significantly outperforming both government bonds and IG corporates.

Alternatives

Our alternatives, which are used to enhance risk-adjusted and lowly correlated returns, were positive for the quarter. We are overweight alternatives due to the current high positive correlation between stocks and bonds. Our holdings of AQR Apex UCITS and Jupiter Merian Global Equity Absolute Return returned 4.96% and 2.26% over Q2, respectively.

Factors

In Q2, quality and momentum emerged as the top-performing factors. This impressive performance is largely attributed to the continued influence and growth of AI-related stocks, such as Nvidia and Apple.

Positional changes

For our positioning over the quarter, we opted to realise gains from the Invesco Morningstar US Energy Infrastructure MLP and shift to 1-3-year US treasuries. Additionally, we reduced our Money Market holdings in favor of UK Gilts and 7–10-year US treasuries.

Disclaimer: This document is intended to be communicated solely to persons that fall within the FCA classification of Professional Client. This document is for information and discussion purposes only and does not constitute an offer to sell or a solicitation of an offer to purchase interests in any portfolio managed by Sturgeon Ventures LLP trading as London Tyne. Nothing in this document should be construed as a recommendation, representation of suitability or endorsement of any particular security or investment. Prospective investors should seek their own legal or tax advice.

The information contained in this document has been compiled from sources believed to be reliable, but which have not been independently verified. Forward looking information is provided for illustrative purposes only and is not intended to serve as and must not be relied on by any investor as, a guarantee, an assurance, a prediction or a definitive statement of fact or probability. Simulated and actual past performance is not a reliable indicator of future performance.

All marketing materials are distributed in the United Kingdom to professional investors by London Tyne, a trading name of Sturgeon Ventures LLP utilised under license. Sturgeon Ventures LLP (FRN: 452811) is authorised and regulated by the Financial Conduct Authority (FCA).