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Positive global growth helped equities, while government bonds were hurt by delayed interest rate cuts. Here's our summary of the key events impacting markets and your portfolio during the second quarter of 2024.
The quarter in review
The second quarter of the year saw the world's major central banks maintaining a balancing act. They have been making progress in reducing inflation, while at the same time sustaining the global recovery in economic activity.
Policy makers are looking to lower interest rates, which remain at relatively high levels globally. Indeed the European Central Bank (ECB) was the first among the major advanced economy central banks to cut its benchmark rate in early June.
However, the clear path to rate cuts that seemed to be opening up at the start of the year began to look more problematic as wages growth remained strong throughout the second quarter. Wages are running around 4% in the US and 6% in the UK, which comes with inflationary pressure - a key factor in the delay in interest rate cuts.
The goods production side of the global economy also picked up in Q2, having previously stagnated. This, and stable employment, which supports services spending, means more evidence of services price disinflation is required before central banks cut rates significantly.
At the end of March, markets expected the Bank of England to undertake four rate cuts by early 2025. This has been reduced to three rate cuts that are now expected to start later in the year than previously anticipated.
The outlook for monetary policy was not the only change in Q2. Snap elections in the UK and France were called, while campaigning ramped up in the US ahead of President Biden and Donald Trump's November face-off. While not expected to significantly impact markets, it nonetheless promises to be another eventful six months ahead.
Brad Holland, Director of Investment Strategy
Equities in Q2
- Developed market equities (MSCI World) climbed 2.8% in the quarter, while emerging market equities (MSCI EM) grew 5.1%.
- The UK FTSE All-Share index, which is an aggregation of large, mid and small-cap stocks, was up 3.7% in the quarter. The UK economy has been improving, with the latest data showing it grew at a faster pace earlier in the year than had previously been thought.
- The US S&P 500 was up 4.3% in the period, helped by ongoing investor enthusiasm for the so-called 'magnificent seven' (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla).
- MSCI Asia ex-Japan grew 7.3% over the quarter. Moves by the Chinese authorities to support the real estate sector provided a boost there, alongside strong performance from the artificial intelligence-exposed Taiwanese stock market.
- European markets (MSCI Europe ex-UK) were up by just 0.6%, not helped by volatility in June given concerns around the outcome of the snap French election.
US tech leads the way
"Companies exposed to artificial intelligence continued to outperform other areas of the market, and a strong earnings season for US tech companies meant global growth stocks were once again the top performing asset class, delivering 6.4% over the quarter," Maximilian McKechnie, Global Market Strategist, J.P. Morgan Asset Management
Gains for major tech-related S&P 500 stocks so far in 2024
Nvidia has accounted for around one-third of the S&P 500's gains this year. Note, these figures refer to past performance, which is not a reliable indicator of future performance. Values may go up or down with currency fluctuations.
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Bonds in Q2
- Global investment grade bonds delivered negative returns of -0.2% over the quarter.
- European and US high yield were the top performing fixed income sectors, delivering returns of 1.5% and 1.1% over the quarter, respectively.
- Developed market government bonds have suffered, hurt by changing expectations around interest rate cuts.
A more positive outlook for fixed income:
"Multi asset investors should take heart from the fact that, even though fixed income has underperformed in the short term, the overheating worries of April appear in the past and markets are confident the next move for the major developed market central banks is to ease policy rather than tighten. As a result, the medium-term outlook for fixed income still looks attractive," Maximilian McKechnie, Global Market Strategist, J.P. Morgan Asset Management
Read more:
"The higher-for-longer interest rate environment has meant that the main source of investor returns from fixed income has changed, from capital growth to yields."
In our recent article, Brad Holland explores bond performance, inflation, and the impact on low-risk portfolios.
How we are positioning your portfolios
- We are overweight equities, compared to our long-term average, with a preference for the US and Japan.
- We remain slightly underweight the UK relative to our long-term average, due to the lingering impact of inflation and sluggish economic growth.
- In April we reduced exposure to the Chinese economy, replacing half of our broad-based emerging markets position with an ETF that holds emerging market indices excluding China. Despite the aforementioned attempts by Chinese authorities to support its real estate sector, the country still has some ongoing domestic challenges. There is also the prospect of renewed trade tensions with the US as we approach the presidential election.
- We also took the decision to swap our US treasury exposure into gilts, given the likelihood that the Bank of England will move to cut rates before the Federal Reserve.
- In May, we introduced a position in European industrials in higher-risk portfolios and opened a small position in US technology stocks, which we are building as a long term conviction trade, via a holding in the Nasdaq.
Read more: Why we've reduced exposure to China in favour of other emerging markets
Socially responsible investment portfolios update
Nutmeg's Socially responsible investment (SRI) portfolios have a track record going back to 2018. The portfolios invest with considerations around environmental, social, and corporate governance (ESG) factors. Here's some key points around positioning:
- Like our Fully managed range, the SRI portfolios currently have an overweight towards equities, with a preference for the US and Japan.
- Within fixed income, the SRI portfolios currently hold more corporate bonds and fewer government bonds compared to equivalent Fully managed portfolios.
- This is because the SRI portfolios are required to hold at least 80% of assets in investments with an ESG tilt, and SRI corporate bonds is a more mature and developed sector than SRI government bonds at this time.
Read more:
"The portfolios have increased exposure to companies that have been identified by MSCI's ESG/SRI screening process as engaging in areas such as social justice, environmental sustainability, and clean energy...SRI model portfolios can be an ideal choice for those who want to invest and 'do good' while potentially building their wealth."
The team took a deep-dive into SRI in our recent article: What is socially responsible investing and how has it performed?
Find out more:
The performance of your portfolio will also be influenced by your chosen investment style, your tax wrapper, and how long you've been invested. You can see the performance of your individual portfolio in the app, and to learn more about returns, click here.
For regular analysis of markets, the economy, and the outlook for investors, visit the Insights tab on our website or our Youtube channel.
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 a reliable indicator of future performance. Tax rules depend on individual status and may change. We do not provide investment advice. Always do your own research.