MARKET UPDATE  |  6 AUGUST 2024

Market update

In the past few days, hopes of a calm summer have faded as fears of a recession in the US economy have resurfaced, fuelling a sharp rise in volatility and sell-off in global stockmarkets. Meanwhile, safer-haven assets, such as government bonds, have rallied sharply. A couple of weaker US economic data releases seem to have been the catalyst for the market adjustment, specifically some weaker employment numbers and forward-looking US business sentiment indicators, raising concerns that the health of the world’s largest economy may not be in as great a shape as many had thought.

Certain parts of the US market in particular were probably overdue a reality check, but the speed of the change in sentiment will have caught many investors, particularly those over-exposed to ‘big tech’, off guard. This is where most of the largest market gains had been made in recent months and it is where some of the bigger market declines are currently being seen. Other global stockmarkets, most notably Japan, have also seen a sharp correction, although negative market returns have been partially offset by a significant appreciation in currencies like the yen.

It is too soon to be drawing the conclusion that the US economy is heading towards recessionary conditions, but recent data releases do probably strengthen the argument for slightly greater and swifter cuts in interest rates by the US Federal Reserve (‘Fed’) between now and the end of the year. Ironically, that is actually what markets had been hoping for, so the current market behaviour does appear to be slightly inconsistent and an over-reaction, although it also highlights just how finely balanced sentiment was and still is. That said, having previously trodden a cautious path on monetary policy change, the Fed will be mindful that a more aggressive approach could also send the wrong message to financial markets. The risks of policy error have not, therefore, disappeared.

All in all, markets were probably looking for an excuse to temper the exuberance in certain corners of the market, and now they have it.

“Experience tells us that taking a calm approach during periods of heightened market volatility is generally the better option…”

Experience tells us that taking a calm approach during periods of heightened market volatility is generally the better option than making adjustments in positioning before all the salient facts can be assessed properly. This is the approach we are taking. The recent weaker US economic data do need watching more closely, but equally so does the global market reaction and sudden change in sentiment, which seems quite overdone at this juncture. Indeed, at time of writing, global stockmarkets are already staging a strong recovery. As things currently stand, the chances of a hard US economic landing have only marginally increased, and the balance of probabilities suggests an economy that can still deliver respectable economic growth, with inflation continuing to retreat to target and central bank policy becoming increasingly more supportive. Some perspective is therefore required.

To some extent, what we are currently seeing could actually be the healthy adjustment that many, more seasoned, stockmarket investors had been hoping for, particularly those focusing on fundamental value, including both the quality and visibility of corporate earnings streams. Some of that investment discipline seemed to have disappeared from markets in the past year or so, with the thirst for anything technology-related becoming ever stronger and creating even greater distortions in global stockmarket indices. We see the current volatility as potentially allowing for a healthy readjustment and a useful reminder that, ultimately, stocks that appear to be defying gravity and largely ignoring investment fundamentals or logic can rarely maintain that guise forever.

Even before the markets moves of the past few days, we had already seen some investment fundamentals begin to reassert themselves, playing into the hands of active managers who are naturally skewed away from the mainstream index concentrations. For example, we had seen some improved sentiment towards the more undervalued global medium- and smaller-sized company stocks, evidence that the mood was already beginning to shift away from the expensive ‘mega caps’. That rotation has probably been put on hold for the moment, but it has nonetheless been encouraging to see enthusiasm for this part of global markets begin to gain some traction. Once the dust settles, as we believe it will, we would expect this trend to reassert itself, especially if central banks also lend more of a supportive hand.

“…we believe active investment funds, whether used exclusively in portfolio construction or in combination with passive vehicles, are in a stronger position to navigate these more challenged market conditions and recover more quickly.”

Overall, we believe that our more diversified stockmarket positioning, with underlying managers naturally being more flexible, disciplined about value and having greater focus on investment fundamentals, should allow a safer passage through volatile periods whilst the market leadership rotates. It may take a while for general market confidence to return, but we believe active investment funds, whether used exclusively in portfolio construction or in combination with passive vehicles, are in a stronger position to navigate these more challenged market conditions and recover more quickly.

Many readers will recall our reductions to more defensive alternative investments over the past year and increased allocations to fixed interest positions. For those mandates in need of greater risk diversification, it is very pleasing to see these bond market investments exhibit their traditional defensive qualities, with rising values helping to offset some of the current stockmarket declines. We remain very content with our stance, expecting further benefits as central banks become more confident in needing to switch their monetary policy tactics.

In due course, the current economic and market adjustments may cause us to reshape our portfolio positioning, but for now we believe it is prudent to ride out this period of heightened volatility, let the economic picture become clearer and allow some calm to be restored before a proper reassessment can be made.

As always, we are on hand to answer any questions or address any concerns you may have.

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