Quarterly Market Report Q3 2024
- 3 hours ago
- 10 min read
Overview
In Q3 2024, global financial markets experienced mixed performance, with equities generally advancing despite ongoing volatility. Central banks, including the US Federal Reserve and the European Central Bank, initiated or continued interest rate cuts as inflation eased and economic growth slowed. Emerging markets outperformed developed markets, benefiting from policy easing in the US and China. Challenges persisted, such as the sluggish growth in Europe, particularly in Germany, where weak demand and competition from cheaper exports constrained expansion. Fixed income markets saw gains, particularly in high-yield and convertible bonds, while global currencies fluctuated amid shifting monetary policies.
Positional Changes
During the quarter, we allocated a portion of our portfolios to Emerging Asia Government Bonds and reduced our holdings in World Quality and Japan. This adjustment was made in favour of World Minimum Volatility and Vanguard All-World High Dividend Yield.
Additionally, we replaced HSBC MSCI Emerging Markets with Redwheel Next Generation Emerging Markets to mitigate single-name concentration risk.
All London Tyne portfolios continue to make positive gains in Q3 2024.
London Tyne Cautious returned 2.19%, underperforming its benchmark over the quarter which returned 2.46%.
London Tyne Balanced returned 2.37%, outperforming its benchmark over the quarter which returned 2.28%.
London Tyne Opportunistic returned1.91%, outperforming its benchmark over the quarter which returned 1.64%.
YTD
Year-to-date (YTD) all London Tyne portfolios continue to perform well.
London Tyne Cautious returned 8.73%, outperforming its benchmark which returned 4.65%.
London Tyne Balanced returned 9.70%, outperforming its benchmark which returned 6.01%.
London Tyne Opportunistic returned 11.22%, outperforming its benchmark which returned 7.65%.
US
The US S&P 500 advanced 5.9% over the quarter. All sectors except energy posted positive returns, but information technology saw only a modest gain.
The Federal Reserve left rates at a 23-year high in July, but weaker jobs data in early August stirred concerns. The non-farm payrolls report showed just 114,000 new jobs in July - well below the 175,000 expected - while unemployment rose to 4.3%. This fuelled fears that the Fed might be too late in cutting rates, sparking market volatility as investors priced in significant easing by year-end. Additionally, doubts over the profitability of AI investments added to the unease.
Resilient corporate earnings helped stabilise sentiment, and Fed Chair Jerome Powell signalled an upcoming rate cut in his August Jackson Hole speech. The Fed later announced a 50-bps reduction in September, its first cut since 2020.
US inflation slowed for a fifth consecutive month, reaching 2.5% in August, the lowest since February 2021. The US economy grew 3% in Q2 2024, up from a revised 1.6% in Q1, while unemployment eased to 4.2% in August, aligning with expectations.
Investor attention also shifted to the upcoming US election, with President Biden withdrawing from the race and endorsing Vice President Kamala Harris as the Democratic candidate.
UK
The UK FTSE All-Share Index rose 2.3% during the quarter.
UK economic data has generally been upbeat in 2024, although consumer confidence dipped in September ahead of the October budget announcement. The labour market remains tight, driving persistently high wage growth, which is forcing the Bank of England to take a cautious approach to future rate cuts.
The UK economy expanded by 0.5% in Q2 2024, slightly below the earlier estimate of 0.6% and down from 0.7% in Q1. CPI inflation held steady at 2.2% in August, matching July’s figure and aligning with expectations.
In its September meeting, the Bank of England left the Bank Rate unchanged at 5%, following a 25-bps cut in August - the first reduction in over four years.
Politically, the Labour Party achieved a historic victory in the July general election, securing a parliamentary majority in parliament, with Keir Starmer becoming the new Prime Minister. Meanwhile, the unemployment rate edged down to 4.1% from May to July, in line with market forecasts.
Bank of England Governor Andrew Bailey vowed to take a cautious approach to future rate cuts. Deputy Governor Clare Lombardelli noted that while the inflation outlook is stable, risks of a resurgence remain. Consumer staples, financials, and consumer discretionary sectors led performance, while energy lagged.
Europe ex-UK
The MSCI Europe ex-UK Index returned 1.6% over the quarter. The advance in the market was led by the real estate, utilities, and healthcare sectors. In contrast, the energy and information technology sectors lagged, posting negative returns for the quarter.
The European Central Bank (ECB) held interest rates steady at its July meeting but implemented a 25-bps cut in September. This decision came amid softening inflation, with annual rates falling from 2.6% in July to 2.2% in August and further to 1.8% in September.
Economic activity indicators pointed to a slowdown in the eurozone. The HCOB flash eurozone purchasing managers’ index (PMI) for September dropped to an eight-month low of 48.9, primarily due to a deepening downturn in the manufacturing sector. While service sector activity rose slightly to a reading of 50.5, the weaker PMI data, coupled with softer inflation figures, heightened expectations for further rate cuts from the ECB.
Overall, economic data highlighted the sluggish nature of the eurozone recovery this year, particularly in Germany, where dependence on manufacturing has been a significant drag amid weak demand from China and rising competition from cheaper Chinese exports.
Emerging Markets
Emerging market (EM) equities delivered strong gains in Q3 with the MSCI EM Index returning 8.9%, outperforming developed markets despite a volatile start. Early in the quarter, technology-related stocks sold off sharply, and a Bank of Japan interest rate hike led to the unwinding of carry trades. However, the landscape shifted as US and Chinese monetary policy easing measures helped drive particularly strong returns in September.
Thailand performed exceptionally well in Q3, driven by a stronger currency and the launch of the first phase of a new government stimulus package in September. China also saw double-digit returns, benefiting from monetary stimulus measures announced in September, and anticipation of further stimulus, potentially including fiscal measures.
South Africa showed notable strength as the smooth formation of the Government of National Unity (GNU) and the central bank’s decision to follow the Federal Reserve’s lead by cutting interest rates in September - its first rate cut since 2020 - boosted investor confidence.
On the other hand, India and Brazil underperformed. Brazil was negatively impacted as its central bank reversed recent monetary easing by raising rates to contain inflation, while the government’s increased fiscal spending also weighed on sentiment. Taiwan lagged the broader EM index, particularly earlier in the quarter, as a global sell-off in technology-related stocks hit the market hard.
Korea recorded negative returns, impacted by a sector rotation away from technology stocks due to concerns about the sustainability of the memory chip market’s profitability. The Mexican index ended the quarter in negative territory, despite a cut in interest rates, as uncertainty over judicial reforms dampened market sentiment. Turkey was the worst performer, with local currency depreciation, weaker-than-expected second-quarter earnings, and foreign equity outflows dragging down performance.
Notably, it was not just the US and China implementing rate cuts. The Federal Reserve’s jumbo rate cut has paved the way for many EM countries to follow suit, with the Philippines and Indonesia being among the first to reduce rates in September.
China
The MSCI China Index returned 16.38% over the quarter.
In late September 2024, the People’s Bank of China (PBOC) took significant steps to ease monetary policy, injecting over 234 billion yuan into the banking system and cutting key interest rates. The PBOC also reduced the reserve requirement ratio and hinted at further cuts to boost liquidity. These moves are aimed at addressing economic challenges, including China’s struggling property market.
The stimulus package included measures to reduce mortgage rates, lower down payments for second-home buyers, and increase financing for state-owned firms to purchase unsold flats for affordable housing. They also shared initiatives to allow local governments to purchase idle land from developers through special bond issuances or the central bank’s re-lending.
As a result, Chinese markets rallied, with property shares surging as cities like Guangzhou, Shanghai, and Shenzhen eased property-buying restrictions. Additional market support, including potential capital injections into state-owned banks, further signals the government’s commitment to stabilising the economy and achieving its 5% GDP growth target.
Japan
The Japanese TOPIX fell 4.9% in Q3 2024. The market initially hit a new high in early July, supported by solid corporate earnings and positive macroeconomic data. Quarterly earnings from April to June exceeded expectations, with the weakening yen boosting performance, particularly for export-driven sectors. Domestically focused sectors also showed a strong recovery, aided by positive real wage growth for the first time in 27 months in August, which continued into September.
The Bank of Japan’s (BoJ) July rate hike and comments from Governor Ueda signalling further increases ahead sparked volatility. This coincided with a weak US labour market report, narrowing the interest rate differential between the US and Japan. As a result, the yen appreciated sharply, triggering an unwind of “carry trades” that had relied on Japan’s low borrowing costs. Although a more reassuring tone from BoJ officials later helped to limit stock market losses, the market still ended the quarter in negative territory.
The yen’s strength significantly influenced sector performance. Domestically focused sectors like retail, construction, and information & communication performed well, while exporters, particularly in the auto and machinery industries, struggled. Smaller companies also fared better than large-cap stocks, showing greater resilience amid the currency shifts.
Asia ex-Japan
Asia ex-Japan was the top-performing equity region in the third quarter, as the MSCI Asia ex-Japan Index gained 10.6%. After a relatively flat start to the quarter, Asian stocks surged in late September following new Chinese stimulus measures. While similar policies, such as interest rate cuts and reduced downpayment requirements, had been introduced over the past year, September’s coordinated effort signalled Beijing’s stronger commitment to supporting the economy and markets.
Thailand, Hong Kong, and China led the region, while South Korea, India, and Taiwan underperformed. South Korea was the only index market to end the quarter in negative territory, weighed down by a sell-off in tech stocks and concerns over how AI expansion would impact revenue. The Korean won’s appreciation also hurt export-focused companies.
Australia
The Australian ASX 200 hit a new record high of 8,285.7 by the end of September, finishing the quarter with a 5.52% gain.
At its September meeting, the Reserve Bank of Australia (RBA) kept the official cash rate unchanged at 4.35% for the seventh consecutive time. In its statement, the RBA noted that while higher interest rates are helping to balance supply and demand, underlying inflation has remained above the midpoint of the target for 11 straight quarters and has seen little improvement over the past year.
Commodities
The performance of the Bloomberg Commodity Index was relatively subdued, with a 0.7% return over the quarter. Brent Crude oil prices dropped 17% amid growing concerns about the global economy, though gold surged to new all-time highs. Energy was the weakest sector due to lower global demand, while agriculture, industrial metals, livestock, and precious metals all posted gains. Despite rising tensions in the Middle East, energy prices fell sharply as global demand softened.
Asset class and styles return
Fixed Income
Fixed income sector returns
Fixed income government bond returns
The Bloomberg Global Aggregate Index rose 7.0% over the quarter.
In Q3, many major economies began cutting interest rates. In the US, a larger-than-expected drop in non-farm payrolls, rising unemployment, and lower inflation in August prompted the Federal Reserve to kick off its rate-cutting cycle with a 50-bps cut. This move, along with expectations of faster easing, weakened the dollar and pushed US Treasury yields lower, with 2-year yields dropping 111-bps.
In the UK, the Labour Party won a landslide election in July, but gilt yields remained steady as the result was largely anticipated. The Bank of England cut rates by 25-bps in August - the first change since the COVID-19 pandemic - but held steady in September. UK gilts rallied, driven by the government’s supposedly growth-focused agenda and expectations of further rate cuts by year-end.
The European Central Bank (ECB) also cut rates by 25-bps. While German and French bond yields fell, Italian and Spanish outperformed, showing the strongest bond gains in Europe.
Canada’s central bank continued cutting rates in response to easing inflation and rising unemployment, while in Japan, the yen strengthened against the dollar due to both the Fed’s actions and a Bank of Japan rate hike.
In the corporate bond market, US investment-grade bonds performed well, though global high yield outpaced global investment grade. Amid equity market volatility, convertible bonds provided solid downside protection while participating in the subsequent stock market advancement. The FTSE Global Focus Convertible Bond Index rose 5.8%, reflecting strong upside participation and downside protection.
Debt sustainability concerns affect not only developed economies like the U.S. and Italy, but also China (see figure below), where growth has stalled. Emerging markets (excluding China) generally show stronger fiscal fundamentals. China’s slow recovery, hindered by ineffective gradual stimulus, led to more urgent action in Q3. The latest stimulus package, amounting to 2% of GDP, includes demand-side measures such as unemployment benefits, child support, and pension reforms, aiming to boost GDP growth closer to the 5% target.
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).
Comments