World Market Summary
In most respects for investors, July was the polar opposite of June in that small-caps led, the dollar weakened and mega-cap technology lagged. The yen wiping out the prior four months of losses versus the dollar, courtesy of a strong rally in the last three weeks of July, added to this volte-face.
As the month opened, all eyes were on elections in the UK and France. As they passed without upsetting markets any further, US politics grabbed the headlines due to the failed assassination attempt on Donald Trump and the decision by Joe Biden to exit the Presidential race and endorse Kamala Harris instead.
Central banks added to the drama with the Bank of Japan catching investors unaware with the scope of their rate increase whilst China equally surprised investors by the timing and magnitude of their rate cuts. The Federal Reserve (Fed) helped sentiment by sending out stronger signals that a rate cutting cycle in the US will begin at the September Fed meeting.
As small-cap led, the Russell 2000 Index had its best week of outperformance versus the S&P 500 this century whilst UK small-cap funds saw some investment inflows after many consecutive quarters of outflows.
Globally, there were more signs of an economic slowdown than acceleration and this further helped bond returns but hurt commodities. For example, oil fell over 5% in July, as did copper.
So far this year, various markets have had idiosyncratic periods of weakness, for example China, France, small-caps, mega-cap technology and bonds, but so far there has been no prolonged period of general malaise. We must note that with US households’ exposure to equities currently standing at an all-time high, shares could be vulnerable in the short-term to bad news. Individual shares so far this reporting season have shown more share price weakness than usual if they miss expectations.
However, we believe most of the world is closer to the beginning than the end of benign economic and interest rate cycles, so we remain optimistic for further positive returns between now and year-end.
Our in-depth views on:
Our weightings are based on sterling as a base currency.
United Kingdom
The UK market continued to improve and is now being seen as a political safe haven for many global investors, as election uncertainty drags on in other major economies such as the US and in France. As a result of this, the UK market finally saw inflows after precipitous selling over the last few years.
The global rotation we saw this month into small and mid-caps also took effect in the UK. The FTSE 250 was up 7% in the month while the large-cap FTSE 100 was up 2.5%. The breadth of positive performance in the UK was also encouraging with over 80% of the companies in the FTSE 250 in positive territory. As well as political stability, the UK market has been buoyed by the prospect of interest rate cuts, the underlying performance of the companies as well as the ongoing Merger and Acquisition activity that is seeing many companies being taken out at large premiums to their publicly traded prices. Rachel Reeves’ new housing policy and plans for a New National Wealth fund has also been taken well by the market. This was reflected in currency markets with sterling once again up against the dollar in the month and the economic data has continued to improve.
On this economic data, UK Consumer Price Inflation now stands at 2% and the increase in Gross Domestic Product (GDP) in May came in twice as much as expected, with construction growing at its fastest pace in a year. It was confirmed that UK business investment increased for the second consecutive quarter in Q1, which was encouraging. On the negative side, there were misses in both industrial production and retail sales with the latter hurt by election uncertainty, poor weather and low footfall. All in all, it was another very heartening month for the UK and reinforces why we are overweight the region in our model portfolios.
United States
As mentioned above, this month saw a stark rotation out of large-cap technology and into small-caps. The effect of this was the Nasdaq down 1.59%, while the Russell 2000 finished up over 11%. This move was triggered by US inflation coming in better than expected, with the thesis being that there is now more chance of rate cuts, which will result in a lower cost of financing debt for these companies and, therefore, a more positive outlook. At the same time, concerns about the amount of money it is costing US technology companies to advance their Artificial Intelligence (AI) propositions weighed on stocks in this sector.
July was another volatile month in US politics. It started with an attempt on Presidential candidate Donald Trump’s life and ended with President Biden dropping out of the race and naming Kamala Harris as his successor. We now believe the election outcome is slightly more uncertain, as the betting odds had been previously been highly favouring Trump vs Biden.
On the economic data front, the big news in the US was a massive slowdown in Institute for Supply Management (ISM) services and a slowdown in ISM manufacturing. July was the third straight month of a decline in manufacturing, suggesting the global manufacturing recovery is stalling. The US labour market continued to soften in the month; industrial production was better than expected, and retail sales were slightly worse. University of Michigan consumer sentiment also fell for a fourth straight month.
The good news in the US was Q2 GDP, which came in a bit stronger than expected at 2.8% however the slowdown in the Purchasing Managers Index (PMI) does not bode well for future GDP growth. We continue to expect US growth to slow over the coming months.
Europe
European shares advanced in July and it was noticeable that Spain and Italy outperformed their northern peers, Germany and France. Small-caps in Europe outperformed mid and large-caps but not by as much as they did in the UK or the US. Industrial production fell and was weaker than expected in the July data release but there was also some good economic news by way of a European Central Bank (ECB) release that showed demand for residential mortgage credit grew in Q2 for the first time since 2022. Lack of credit demand has been weighing on the European economy since the invasion of Ukraine so this is indeed good news.
The election results in France can be characterised as a far cry from the worst possible outcome but it does still seem that a consequence of the result will be that the country backs off some of the market-friendly reforms initiated by the Macron-led coalition.
Another reason that France lagged peers was due to the release of weaker-than-expected results from luxury goods companies such as LMVH and Kering. These companies are meaningful components in the French index and performance of these highly valued companies (on a price-to-earnings (P/E) basis relative to the overall market) has been impacted by the slowdown in China. Increased rhetoric and actions with regard trade sanctions with China has also taken the edge off of sentiment. However, the domestic European economy, excluding Germany, continues to edge forward and well valued growth names can still be found, particularly within small and mid-cap shares.
Asia/Emerging Markets
It was a mixed month for shares in the region as the behemoth Hong Kong and Japanese markets fell, the latter partly due to the sharp rebound in the yen. Within this sell off, small and mid-cap shares performed relatively well.
Chinese shares continued the recent trend of selling off on weaker economic data and a resultant policy response that investors deem underwhelming.
At the recent Third Plenum (a Communist Party Policy Setting Forum), a lacklustre consumer was noted and since then, the Chinese Central Bank has cut rates sooner and by more than expected. Chinese shares are cheap and profits are still advancing in many sectors, but for equities to rally sustainably, we are likely to need consumer confidence rising which in turn will fuel investors optimism.
Tech-heavy indices such as Korea and Taiwan also fell but Singapore rose and India also enjoyed positive returns as it remained an investor favourite after Modi’s re-election.
Fixed Income
Government bond yields fell quite sharply over the month, with the notable exception of Japan, which surprised investors with the magnitude of their interest rise and hawkishness of the BoJ statement explaining their decision.
Each of the US, China, Germany and the UK saw two and ten-year yields fall as a combination of weaker for-choice economic data and signals from the Federal Reserve that rate cuts were ever closer buoyed sentiment.
China cut rates by the most since the midst of the COVID pandemic in light of a deceleration in Q2 GDP to below the 5% target, and the Communist Party Plenum publicly noted weak consumer demand.
Although US GDP came in at 2.8% versus the 2% forecast, investors took heart from better (lower) inflation numbers and the fact that the large contribution to GDP growth from inventory build was not sustainable.
UK wage growth decelerated further in line with expectations.
Although market expectations about interest rate cuts have waxed and waned year to date, we retain our long-held view that two rate cuts in 2024 is the most likely outcome for the US, UK and Europe.
Alternatives
Oil price declined in excess of 5% over the month, largely resulting from concerns over further demand weakness from China. Brent oil briefly dipped below $80 per barrel to hit a seven-week low, before rallying strongly on the final day of the month. This late surge resulted from the supply concerns associated with Israel killing the main Hamas leader and senior commander of Hezbollah, with Iran vowing to respond accordingly. The US and UK are working to avoid a full blown war, but tensions are unlikely to subside any time soon. Meanwhile, The Organization of the Petroleum Exporting Countries (OPEC+) continue to remain committed to oil supply cuts and US inventories have now contracted for five consecutive weeks. Hence, Brent oil should continue to find support at the $80 price mark.
Gold similarly surged towards the end of the month in the face of rising geopolitical tensions, but its superior performance prior to the news out of the Middle East left it with a close to 4% rise over the month. The Fed’s dovish press conference further fuelled the rally, with interest rate cuts notoriously beneficial for the yieldless precious metal. Central bank purchases from China have now halted, but geopolitical tensions, rate cuts and the potential for a weakening dollar make for a supportive environment going forward.
Property
UK property prices increased by 2.1% in July on a yearly basis, which compared favourably to the 1.5% rise in June. This was the largest price upswing since the end of December and marked the sixth consecutive month of rising house prices. However, house prices remain 2.8% short of the prices witnessed in summer 2022. The RICS UK Residential Market Survey house price balance remains in negative territory, and affordability remains the headwind, but this is likely to improve with interest rate cuts on the horizon, and this will be supportive for house prices. Asking prices sitting at their highest level in 18 months demonstrates the growing demand. Still this demand could be offset by the positive outlook for supply given the intentions of the new labour government and construction PMI remaining in expansion for the fourth consecutive month.
US 30-year mortgage rates are down to their lowest level since March. The contraction in pending and new home sales is easing, but alongside existing home sales, they remain in contraction.
Learn more…
Sell off: Occurs when a large volume of securities is sold in a short period.
For more industry terms and definitions, visit our glossary here.
Important Information
All Index data figures are sourced by Morningstar and correct as at 31 July 2024, unless otherwise stated.
The value of investments or any income arising from them may fluctuate and are not guaranteed. Past performance is not necessarily a guide to future performance.