What has happened over the last 3 months…
The month of June 2024 proved to be a month of progress in terms of inflation cooling. Following the hotter than expected CPI prints earlier in the year, inflation has been trending lower, however, the central bankers remain cautious. The US had a cooler than expected reading for the May 2024 print, though members of the US monetary policy committee have broadly commented that they will need to see a sustained period of at least 3 months of cooling inflation before cutting interest rates. At the start of the year, markets were anticipating up to seven interest rate cuts through 2024; this now stands at only two, commencing at the back end of the year, from September at the earliest.
Meanwhile, the UK is out of recession and inflation seemingly under control with the May 2024 print at 2% year on year. However, expectations for a cut in UK interest rates were dashed as the governor of the Bank of England said that whilst things were moving in the right direction, policy makers need to see more evidence that price rises have slowed before cutting rates. All eyes will be on UKs June CPI report due to be published on 17th July.
In early June, the European Central Bank (ECB) became the second major western economy, after Canada, to cut interest rates, as the ECB president confirmed that they had made progress in tackling inflation. However, the ECB President confirmed that she expected inflation to remain above the 2% target and therefore would not commit to a particular rate path.
It has been busy on the political front. The UK now faces a general election after the surprise announcement by Rishi Sunak in May. All polls point to a regime change on 4th July, with Labour set for a landslide victory. The prospect of regime change presents a host of uncertainties in terms of expected changes to fiscal policies, especially taxation. At this time, there remain question marks over important tax policies, including capital gains tax. For now, we shall avoid speculating and await clarity as the year progresses.
EU voters went to the polls earlier this month for the European parliamentary elections and clearly voted decisively against the incumbents as protest against the handling of European policies over the last few years. The repercussions have been dramatic with the French President calling a snap general election and the resignation of the Belgian Prime Minister. The first round of the French parliamentary election was won by Le Penn’s far right party. The second round of the elections will conclude the process on 7th July.
Meanwhile, the US election in November continues to see Donald Trump ahead in the polls despite being found guilty on 34 felony counts in his ‘Hush Money’ Trial, which over the following days saw him actually gain greater support and campaign funding. Following the recent debate between Biden and Trump, all eyes are now on the July Democratic National Committee and whether President Biden continues as the Democratic nominee given the widespread concerns surrounding his health. A month is a long time in politics and there will be more clarity in our next update.
Market reaction over the last three months
Over the month of June 2024, the FTSE 100 was down 1.34% and over 12 months up 8.40%. In sterling terms, the more technology and growth biased US S&P 500 index was up 4.21% over the quarter and up 23.40% over the 12 month period. Meanwhile, the global FTSE All World Equity Index in sterling terms was up 2.73% for the quarter and 17.93% over the 12 months.
Outlook…
Looking out towards the rest of 2024 all eyes will be on company earnings, as investors look to focus on company fundamentals. Earnings are expected to be solid over the next half of the year, however, this is likely as a result of the artificial intelligence (AI) premium that has already seen ‘Mega-Cap’ companies such as Nvidia, Microsoft and Apple rally significantly during the first half of 2024, following which all three are today over $3bn in market capitalization. The AI story is not an exclusive of the ‘Mega-Caps,’ indeed according to FactSet, during the first quarter of 2024 a total of 199 companies discussed AI in their quarterly result conference calls. Therefore, we believe there is scope for a broadening out of the market rally, as non-technology sectors catch up to the AI market premium. However, whilst the AI theme is an exciting long-term theme, and is expected to change our lives, the question is now whether the AI story is going to be as revolutionary as expected at this early stage. It is likely that the market has baked in too many of the future AI earnings growth opportunities, which could see a broad and temporary market pull back. We continue to monitor our long-term themes on a regular basis, of which technology is one.
We expect near term inflation to eventually be rangebound between 3% and 4%, giving central banks the wiggle room to cut interest rates towards the back end of this year. We anticipate two rate cuts in 2024 and possible room for further cuts in 2025 should the economy begin to wobble. This should present a positive backdrop for the equity markets; however, we do anticipate volatility to pick up around key election results and in the aftermath of budget announcements. Should there be a slowdown in the AI excitement, we could see earnings expectations revised downwards, which would further cause some market volatility. However, over the medium to long term, we continue to believe that there are excellent quality opportunities in the markets that should prove resilient through volatile markets.
Important Information
This article is for information only and does not constitute advice or recommendation and you should not make any investment decisions based on it. The views and opinions of this article are those of Casterbridge at the time of writing and may change without notice. Any opinions should not be viewed as indicating any guarantee of return from investments managed by Casterbridge nor as advice of any nature. It is important to remember that past performance and the value of an investment, and any income from it, may go down as well as up and the investor may not get back the original amount invested.
