Nutmeg investor update: August 2024

How did global financial markets perform in July? 

July was a tale of two halves for global equity markets. Rising in the first half of the month, they largely gave back their gains in the final fortnight. This meant a broadly flat end to the month for global equities in sterling terms. However, a stronger pound has worked against UK investors in foreign stock markets, reducing the value of investments in foreign currency.

The greatest losses were felt by larger companies in two regions which until July had been this year's top performing, the US and Japan. Smaller companies had a relatively strong month, buoyed by the potential for lower interest rates in the coming weeks. In the US, small companies rose by 7.7% in July alone.

Closer to home, UK equities have performed strongly in July, with large caps rising 2.5% and mid caps up 6.7%. In emerging market equities, standout performances in India, Brazil and Mexico were muted by lagging major Asian economies. 

Bond markets delivered positive returns, with government bonds in the UK and the US rising around 2% and 3% respectively. Within corporate bond markets, the top performers were high yield bonds, with returns of 2%. These returns are compensating for higher risks, as these companies have lower credit ratings.

Since the end of July, financial markets have been volatile as investors digested the latest central bank decisions and company earnings, alongside weaker than expected data for employment in the United States. This has resulted in losses for global equity markets as investors re-adjust portfolios, yet we continue to believe the outlook for economic growth is rosier than the current market environment would suggest.

Volatility is part of investing in financial markets, but it can still be uncomfortable to see the value of your portfolio fluctuate. However, as is the case whenever markets are volatile short term, remaining focused on your long term goals is the key to investment success.  

Companies across the globe have begun reporting their results for the second quarter of 2024. What have we learnt so far?

Put simply, I think we've learnt that expectations are high. While earnings have been largely robust, not all investors are satisfied. This disappointment is reflected in some falls in share prices. Microsoft is a great example of this. Investors appeared disillusioned with the slowing growth of Microsoft's cloud computing business reported in late July. But with growth of 29% in the last quarter and a rise in the contribution from AI, that perspective needs to be treated with some caution.

Around half of large US companies had reported second-quarter earnings by July's close, and the results have been broadly positive. So far, earnings expectations have been beaten in most sectors, though the weakness in the consumer discretionary sector is being watched closely. Elsewhere in developed markets, results have not been as strong as the US, but fewer companies have reported so far.

In emerging markets meanwhile, earnings have exceeded expectations by some margin, though only around 20% of companies have reported. As with all markets, we will have to wait for the full picture before forming any conclusions. 

Central bank activity has been another focus for investors. How are markets reacting?

Most western central banks are debating when to cut interest rates, but Japan is still in the very early stages of raising rates. In July, their central bank raised interest rates to 0.25%, continuing a journey that began with the end of negative interest rates in March. That was largely unexpected by investors, but represents a cautious approach, which will no doubt continue given the reaction we saw in currency markets to the decision - one cause of the market volatility in August.

In the US, the Federal Reserve once again held interest rates firm, but strongly signalled September will be the month in which they make a first adjustment lower. Employment data released since the Fed's decision has led some investors to question whether they've been too cautious, and amid market volatility in early August, financial markets are now expecting close to five cuts to interest rates before year end.  

In the UK, the Bank of England reduced the base rate by 0.25% - the first decrease since Covid. It was a tight decision amongst voting members, at five votes to four. The cut will be welcome news to businesses and consumers who have been contending with interest rates at a 16-year high. We believe that the Bank of England will take a cautious approach to further rate reduction given the UK's elevated wages growth and updated economic growth forecasts. For more on what this means for investors, you can explore our commentary on the insights section of the Nutmeg website.

The Nutmeg investor update is also available as a podcast. Listen to this month's update below. 

About this update: This update was recorded on 6th August 2024. All figures, unless otherwise stated, relate to the month of July 2024.

Risk warning

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past performance and forecasts are not reliable indicators of future performance.