Investment Update – July 2024

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What happened in markets?

Global equities returned 2% in July, although relatively modest moves in headline indices masked some major rotations within equity markets. The catalyst was US inflation falling faster than forecast in June, with the headline rate coming in at 3%, down from 3.3% in May. Lower bond yields and the prospect of a Fed cut in September sparked a significant rally in US small cap stocks, with market leadership shifting from growth to value. Tech was the biggest drag on the market, with financials, utilities and real estate amongst the outperformers.

Bond yields were broadly lower over the month as positive news on inflation, combined with some evidence that global economic conditions continue to moderate, prompted markets to price in further rate cuts by the major developed market central banks before the end of the year. The US dollar also weakened in response to lower US inflation and signs that the labour market was cooling. It was a mixed picture in real assets as gold rose 4%, oil fell 4% and industrial metal prices fell 6%. Listed infrastructure and real estate enjoyed gains of 4% and 6% respectively.

Labour’s comfortable victory in the UK election helped extend the recovery of UK small and mid-cap stocks, which have greater exposure to the domestic economy than their large cap counterparts. UK equities are once again seeing inflows from international and institutional investors, enticed by a relatively stable political backdrop and an improving growth and inflation mix. Sterling, the best performing major currency this year, enjoyed further gains.

What did we do in the funds?

Investment activity was confined to our bond allocations once again, as we introduced the Abrdn Global Corporate Bond Screened Tracker Fund. This tracks a Bloomberg Global Corporate Bond Index which applies an ESG screen to exclude companies involved in controversial weapons, UNGC violations, thermal coal, oil sands, shale energy and tobacco. This reduces the universe of the global corporate bond market by c.10% but tracking error is expected to be just 0.20% (tracking error is the expected difference between the return of a fund and the underlying index). The fund is very large at just over £8bn and provides the most cost-effective way to obtain global corporate bond exposure, with an OCF of just 0.08%.

Within VT Esprit Careful Growth and VT Esprit Tactical Balanced we sold the positions in the Amundi Global Aggregate Bond ETF and the L&G Short Dated Corporate Bond Index to accommodate the Abrdn fund, in addition to increasing the existing positions in the Amundi UK Government Bond ETF. In the Balanced fund we also increased the iShares Treasury Bond ETF to maintain the same allocation to bonds.

The Abrdn fund was also purchased in VT Esprit Tactical Growth with the L&G Short Dated Corporate Bond Index being sold. We also increased the Amundi UK Government Bond ETF marginally.

Finally, after a strong post-election rally, we trimmed the L&G UK Mid Cap Index in VT Esprit Tactical Alpha Plus in order to increase the SPDR S&P 500 ETF, further reducing our US equity underweight.

What is the outlook?

A packed economic calendar at the end of the month saw the Japanese central bank raise rates to 0.25%, the Fed all but confirmed a September rate cut, and the Bank of England reduced interest rates from 5.25% to 5% in a finely balanced decision. The Bank of England was careful not to let markets run away with the idea that this was the first in a quick succession of rate cuts, but we expect them to cut rates at least once more before the end of the year. Services inflation and wage growth remains problematic, but we expect further progress in each of these areas.

The US economy appears to be slowing, although a stronger-than-expected Q2 GDP report was at odds with recent economic data releases. However, central banks have room for manoeuvre and a further deterioration in economic data, and the labour market in particular, will put pressure on the Fed to act more decisively in September with a larger 0.50% rate cut not out of the question.

The US earnings season has been mildly positive, despite some high-profile misses by Tesla and Microsoft. We now await Nvidia’s results at the end of August for further evidence of the longevity, or otherwise, of the AI fuelled rally in semi-conductor stocks. Beyond the summer we have the distraction of the US presidential election, where the odds of a Trump presidency have fallen slightly in recent weeks.

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Written by:
Charlie Lloyd
Head of Investment, Skerritts

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