Keeping You Informed Matters
Economic Review October 2024
Markets continue their ascent as they ‘climb the wall of worry,’ with investors balancing conflicting economic data, the escalating hostilities in the Middle East, diverging central bank policies, and ongoing geopolitical uncertainty. While the quarter closed on a positive note despite these challenges, predicting what comes next remains as complex as ever.
The Outlook
An extraordinary quarter
A fascinating research paper was published last month, entitled ‘When a Crystal Ball Isn’t Enough to Make You Rich’.* In an experiment, 118 financially literate adults played a game whereby they could see business newspaper headlines a day in advance (selecting days randomly from history). Asset price moves were blacked out, and participants were allowed to trade in stocks and bonds using a notional pool of money. Even with this ‘perfect crystal ball,’ most traders failed to do well: “About half of them lost money and one in six actually went bust.”
It feels like we are in the middle of just such an experiment when we think about the quarter just finished. Consider this: the conflict in the Middle East escalated sharply, with a series of attacks in Lebanon and missile strikes on major Israeli cities. If you had known this in advance, you probably would have bought oil; plus, maybe defence shares. Over the quarter, though, oil prices fell sharply and so did oil shares; defence shares were lacklustre. The crystal ball would not have helped… it would actually have hindered. Consider this, next: German economic activity slowed sharply during the quarter, with business sentiment plummeting and industrial activity shrinking. A recession looks imminent. You would want to sell German shares, right? Well, that would have been a mistake too… the German stock market performed well and ended the quarter at a record high. Finally, consider the Chinese economy’s weakness: steadily falling property prices, a deteriorating employment outlook and a collapse in inwards foreign direct investment. Should you have sold Chinese shares? No, bought!
It is perhaps no surprise that economists’ forecasts are currently all over the place. We have seen one economic forecasting team predict an imminent US recession and call for investors to “get defensive”; and we’ve seen the exact opposite from a different economics team. We have seen an asset allocator argue for a focus on just artificial intelligence stocks, and another saying buy all risk assets. It is clearly difficult out there!
There was so much news during the quarter, and so many bizarre reactions to the news, that we could write a very long report to you. Instead, we have distilled it down to just two main events:
- On July 11th, a benign US inflation figure was published, and a vicious market rotation started: big US tech stocks (the ones that had been rising strongly for much of the past year) plummeted, and smaller and mid-sized US stocks rose sharply. At the same time, the Japanese Yen, which had been falling for years, rose sharply. The Yen’s reversal was associated with the unwinding of a speculative trade known as the ‘Yen carry trade’ whereby traders borrow money in Yen (where interest rates are close to zero) and put the proceeds into higher yielding or rapidly inflating assets (like high-yielding Mexican Pesos, or popular US tech stocks). This unwind and these rotations went on for a few weeks and then paused. It is not obvious what happens next.
- On September 24th, the Chinese authorities announced the largest monetary, fiscal and market stimulus since the pandemic. This was designed, according to Reuters: “to pull the economy out of its deflationary funk and back towards the government’s growth target”. After a long period of falling share prices, Chinese stock markets rose by over a quarter in the following week.
In both these cases, strategies that had worked for a long time (being ‘long’ of US tech stocks, borrowing in Japanese Yen, being short of Chinese shares) reversed suddenly, imposing big losses on traders and investors who had enjoyed earlier gains. To do well in that environment, it would have been necessary to go against the grain and pre-position for change. You would have had to suffer the indignity of losing ground to others for a while, with no proof that your positioning would ever be correct.
*Haghani, Victor and White, James, ‘When a Crystal Ball Isn’t Enough to Make You Rich’ (September 23, 2024).
Portfolios
During the quarter, portfolios did well, with all portfolios gaining and performing well relative to peer group comparisons. The absolute gains were partly because we have well-diversified portfolios. Many assets, including shares and bonds, rose during the quarter. The out-performance was mostly due to being well-positioned for the sharp reversals that are described above: we have been lightly invested in the big US tech stocks that suffered a reversal in July – we had written extensively about this topic in previous quarterly reports. We did not suffer from the sudden Yen strength and the collapse of the Yen carry trade (we actually gained very slightly from Yen strength). We were not caught out by the sudden Chinese stock market recovery. We hold a fund, Prusik Asian Equity Income, which invests substantially in depressed, but seasoned, Hong Kong shares. Its performance had been disappointing of late, and we considered whether or not to remove this fund from portfolios. We chose to keep it, as the underlying assets were seemingly undervalued, the manager’s process was credible, and the fund helps to diversify portfolios. This fund has responded sharply, and positively, to recent events.
We also benefited from a take-over bid for a UK real estate investment trust, Balanced Commercial Property Trust (BCPT), that we own across portfolios. This was a share that we have held for some time and added to just after the ‘Liz Truss Moment’ of 2022, when gilt yields spiked, and UK property shares slumped. It has been uncomfortable owning this share, with lots of negative news and stories around UK commercial property. Nevertheless, we have received good dividends from BCPT over the years we’ve owned it and have now received a full and fair take-over bid. The path was not enjoyable, but the outcome was satisfactory.
Outlook
We think it is sensible to make no forecasts right now. Nobody knows what is going to happen next, either politically, economically, or even in terms of how markets might react to the news. The upcoming US election, the next major market event, adds further layers of uncertainty. Historical trends show that while elections often spark short-term volatility, they tend to have a limited impact on long-term market performance. Nonetheless, we are carefully monitoring potential policy shifts, as each candidate’s stance on taxes, trade, energy, and immigration could significantly influence various sectors.
A win by either party could introduce new fiscal policies. For instance, if tax cuts and increased borrowing are pursued, budget deficits could widen, putting upward pressure on interest rates and potentially affecting corporate earnings. Alternatively, proposed trade barriers could complicate inflation control efforts by driving up costs, with effects spilling over to both consumer and corporate spending. Changes to immigration policy may also affect the labour market, with potential consequences for wage growth and inflation, setting the stage for a challenging year ahead, regardless of who takes office.
While we are not making predictions, we are committed to prudent investment strategies with a thoughtful time horizon. Our balanced approach, which emphasises high-quality growth with defensive positions, has demonstrated its resilience over the last quarter. This balance will help us navigate the anticipated volatility leading up to the election and beyond.
Key facts about the world
United Kingdom
- Labour wins UK election, with a majority of 172 seats – the largest since 1997. The Conservatives experience their worst result since the inception of the party in 1834.
- Bank of England cuts rates for the first time since March 2020, taking the headline rate to 5% in August as inflation which had returned to the central bank’s target of 2% at the end of Q2, rose to 2.2%.
- Within this, the key driver was Services inflation, which rose to 5.6%, marginally above economist expectations of 5.5%.
Europe
- The European Central Bank cut rates by 0.25% to take the headline rate to 3.5%, as falling industrial output in Germany and Italy stoked fears that growth in the economic bloc could be coming to a halt.
- Top economic institutes in Germany have downgraded their forecasts for growth in the country, stating Germany’s economy would shrink by -0.1% in 2024 (vs +0.1%) and expand by +0.8% in 2025 (vs +1.4%).
- The Austrian far right experienced a historic victory towards the end of September, as the FPÖ won 29.2% of the vote. The leader of the party, Kickl, is sympathetic to Russia, and a strong critic of the EU’s support for Ukraine.
Asia
- Following the Bank of Japan’s interest rate hike, the Yen carry trade – investors borrowing cheap Yen and reinvesting into higher yielding foreign assets – unwound sparking a global market fallout.
- Chinese equities experienced their best week since 2008 after Beijing announced economic stimulus that included a £86.6bn lending pool for the country’s capital markets.
- Japan’s ruling Liberal Democratic party elected a new leader, Shigeru Ishiba, in what was a surprise result. In an attempt to secure his mandate to lead, he has called a general election set to take place in late October.
North America
- The Federal Reserve cut interest rates by a bumper 0.5% in September, after holding them at a 23-year record high in July. According to forecasts released after the decision, rates are expected to fall by another half percentage point by the end of the year.
- US President Joe Biden stepped out of the race against Donald Trump, with the Vice President, Kamala Harris now the Democratic Nominee for the presidential election. This narrowed the gap between the two candidates considerably and the race is now too tight to call.
- Donald Trump experienced two attempted assassinations, as political violence in the US looks to be becoming a more prominent issue.
South America
- The poverty rate in Argentina has soared to 52.9% under the severe austerity programme implemented by President Javier Milei. It is the worst rate in 20 years and is an 11.2% increase since the end of 2023.
- Chile risks its reputation as an emerging market haven due to plans to cut revenues for smaller renewable power operators, mainly solar providers generating less than 9MW. The cut to revenues would fund an electricity subsidy for poorer consumers. If approved, the plans could push many operators into technical default, potentially deterring foreign investors who injected £16.5bn into the country last year.
- In a widely contested result, Nicholas Maduro claimed victory in Venezuela’s presidential election. Details of the result have not been published by Venezuela’s National Electoral Council, but opposition figures found Edmundo González to be the real winner, with 7.1m votes compared to Maduro’s 3.2m.
Africa
- The Nigerian financial sector continues to attract investor interest and is seeing recovery across multiple asset classes, with the Mutual Funds Market the latest to post strong gains in Q3 and rising 13.95% over the last year.
- Tunisia jailed presidential candidate in a pre-election crackdown ahead of the October poll.
- China’s Xi Jinping pledges $50bn over three years as part of the China-Africa blueprint which aims to bolster infrastructure, trade, and economic ties, focusing on sustainable development and financial partnerships.
- The nationalisation of two gold mines in Burkina Faso for $80 million is part of a shift towards increased state control over its resources, especially those tied up in legal and contractual disputes. This move aligns with broader regional trends emphasizing resource sovereignty.
Q3 2024 Performance Review
Unconstrained strategies
Key facts
Strong performance amid volatility
Fixed income stability, positive returns
UK and Japan equity gains
Alternatives and Gold strength
Property allocation boost to performance as another UK REIT acquired
Adjustment to global equity, increasing US and global small cap exposure
Summary
Despite the quarter’s volatile and often chaotic market conditions, shaped by fluctuating US Federal Reserve interest rate expectations, the escalating conflict in the Middle East, economic challenges in China, and the unwinding of the Yen carry trade, our Unconstrained strategies have performed strongly, consistently outpacing peer benchmarks.
Within the lower risk strategies, the fixed income element has seen more ‘normalised’ moves in response to the varied economic data compared to previous quarters, which is somewhat of a relief. All bond funds provided a positive return in-line or ahead of their relative benchmarks, allowing us to complete some minor adjustments and consolidation to preferred funds. The TwentyFour Corporate Bond fund was sold (+2.7% to point of sale), consolidating proceeds into the Artemis Corporate Bond (+2.6%), iShares $ Treasury 1-3 Year Bond ETF (+2.8%), and Amundi UK Government Bond (+2.3%). The change diversifies some of the risk from corporate bonds into government bonds, which pay a near equivalent yield currently.
The property allocation in strategies has had a stellar quarter where we have seen the board of Balanced Commercial Property (+21.4%) accept a cash offer from Bidco at 96p/share. This was a discount to the latest Net Asset Value (NAV) of the underlying properties of 8.7% when the bid was made at the start of September, but a significant premium to the share price, which has seen it rise to trade near the 96p since. This is yet another takeover in the UK REIT space, following UK Commercial Property which we also held previously. The remaining property position once the sale completes will be the globally diversified Schroder Global Cities Real Estate fund (+8%), which has also enjoyed some strong performance as bond-proxy property holdings have performed well on interest rate cut expectations.
Within equity, the primary change has been the sale of the final position in the Regnan Global Equity Impact Solutions fund (-3.1%), which unfortunately has continued to struggle and fallen against expectations as mentioned in previous updates. The proceeds have been redistributed to existing positions in the US and global smaller companies: Xtrackers S&P 500 Equal Weight ETF (+2.1%), and American Century Global Small Cap Equity (+0.6%) where we see continued opportunity for growth over the coming quarters.
Other highlights in equity have been the JO Hambro UK Opportunities fund (+7.1%), taking advantage of the difficult conditions in the UK. The Japanese holdings, iShares MSCI Japan ETF (+5.7%) and Zennor Japan (+8.2%) saw improvement following weakness in Q2, as did the Prusik Asian Equity Income fund (+9.2%) with China and Hong Kong performing well after authorities introduced a significant package of stimulus to try and turnaround the recent equity market declines.
Finally, within the Alternatives allocation, it is worth highlighting the continued strong performance of gold, with the Royal Mint Responsibly Sourced Physical Gold ETF (+12.8%) in the quarter. We continue to add to the Gravis UK Infrastructure Income fund (+5.6%) where the appealing yield over 6% and value opportunity in the discount to NAV of the underlying holdings remains attractive.
| SECTOR | Q3 2024 | 1 year to 30/09/24 | 1 year to 30/09/23 | 1 year to 30/09/22 | 1 year to 30/09/21 | 1 year to 30/09/20 | 5 years (annualised) |
|---|---|---|---|---|---|---|---|
| IA UK Index Linked Gilts | 1.5% | 6.2% | -9.8% | -31.0% | -0.7% | 1.3% | -7.8% |
| IA £ Corporate Bond | 2.6% | 11.1% | 7.1% | -20.8% | 1.2% | 4.3% | -0.1% |
| IA Property | 2.1% | 1.6% | -9.4% | 5.0% | 3.4% | -4.3% | -0.9% |
| IA UK Equity Income | 2.8% | 15.3% | 13.3% | -8.8% | 32.6% | -17.4% | 5.5% |
| IA UK Smaller Companies | -0.3% | 15.7% | 2.1% | -32.4% | 48.7% | 0.0% | 3.5% |
| IA North America | -0.1% | 20.6% | 8.1% | -2.4% | 25.3% | 9.3% | 11.7% |
| IA Europe Excluding UK | 0.4% | 14.6% | 19.0% | -16.0% | 22.4% | 3.2% | 7.7% |
| IA Japan | 1.5% | 10.9% | 10.7% | -15.9% | 16.5% | 5.7% | 4.9% |
| IA Asia Pacific Excluding Japan | 2.9% | 14.1% | 0.3% | -10.5% | 15.4% | 8.1% | 5.0% |
| IA Global Emerging Markets | 1.5% | 13.0% | 2.6% | -15.5% | 17.3% | 1.7% | 3.2% |
Source: Morningstar in GBP. Net income reinvested. Past performance is not a reliable indicator of future results.
The positioning of our Unconstrained strategies
Cautious
Growth
Balanced
Adventurous
Q3 2024 Performance Review
Ethical strategies
Key facts
Easing inflation and stable interest rates benefit ethical strategies’ natural growth bias
Renewable energy resilience driven by policy support and increasing consumer demand
Ethical strategies sidestep value corrections seen in large-cap tech sector
Strong demand for ESG/Green bonds sees new product launches increasing
Ethical and sustainable fund flows more positive, attracting renewed investor interest, especially in regions like Europe
Summary
Despite a turbulent quarter marked by volatile market conditions driven by Federal Reserve rate speculation, geopolitical tensions in the Middle East, China’s economic slowdown, and fluctuations in the Yen carry trade, our Ethical strategies performed well, surpassing expectations and demonstrating resilience amid these challenges.
Within the lower risk strategies, the fixed income element has seen more ‘normalised’ moves in response to the varied economic data compared to previous quarters, which is somewhat of a relief. This allowed us an opportunity to reposition the funds with the introduction of the recently launched Goldman Sachs Global Green Bond ETF (+3.7%), which focuses on G7 government and supranational bonds, and very high-quality corporate bonds issued specifically to finance climate and environmental projects contributing to positive environmental benefits. To make way for this, we have sold the Aegon Ethical Corporate Bond fund (+2.1% to point of sale) in the Cautious strategy, and reduced the Liontrust Sustainable Future Corporate Bond fund (+3.1%) in Balanced and Growth strategies, both of which, while good funds, have similar risk and return profiles and allow us to increase diversification outside of the different manager selection in this element of portfolios.
Within equity, the primary change has been the sale of the final position in the Regnan Global Equity Impact Solutions fund (-3.1%), which unfortunately has continued to struggle and fallen against expectations as mentioned in previous updates. The proceeds have been redistributed to existing positions in the BNY Mellon Sustainable Global Equity Income fund (+5.3%), and EdenTree Responsible & Sustainable Europeean Equity fund (+5.8%). Both are more focused on high quality, value companies, but with the EdenTree fund we also maintain a bias towards developed European countries similar to Regnan, where we see continued opportunities for growth from companies with an ethical and sustainable focus.
Other highlights in equity have been the UK allocations, with the Aegon Ethical Equity, CT Responsible UK Income and Janus Henderson UK Responsible Income all returning over 4%, taking advantage of the difficult conditions in the UK. In emerging markets, the Vanguard ESG Emerging Markets All Cap Equity Index ETF (+4.4%) was positive as the region benefited from a weaker US dollar and recovery towards the end of the quarter from China and Hong Kong following late intervention and further stimulus to try and turnaround the recent equity market declines.
Finally, within the Alternatives allocation, it is worth highlighting the continued strong performance of gold, with the Royal Mint Responsibly Sourced Physical Gold ETF (+12.8%) in the quarter. We continue to add to the Gravis UK Infrastructure Income fund (+5.6%) where the appealing yield over 6% and value opportunity in the discount to NAV of the underlying holdings remains attractive. The Downing Renewables & Infrastructure Trust (+6.2%) also enjoyed some stronger performance as bond-proxy infrastructure holdings performed better on interest rate cut expectations.
| SECTOR | Q3 2024 | 1 year to 30/09/24 | 1 year to 30/09/23 | 1 year to 30/09/22 | 1 year to 30/09/21 | 1 year to 30/09/20 | 5 years (annualised) |
|---|---|---|---|---|---|---|---|
| Global Sustainable | 0.4% | 19.2% | 9.4% | -6.8% | 18.8% | 4.9% | 8.7% |
| UK ESG Enhanced | 2.2% | 13.9% | 17.3% | -7.4% | 26.6% | -17.9% | 5.2% |
| US ESG Enhanced | 0.1% | 23.9% | 11.2% | -1.2% | 24.7% | 11.3% | 13.6% |
| Developed Market Europe Sustainable | 1.6% | 17.4% | 15.2% | -13.7% | 22.1% | 2.5% | 7.9% |
| Emerging Market ESG Enhanced | 1.8% | 10.5% | 0.2% | -12.9% | 10.9% | 0.5% | 1.5% |
| UK Corporate Bond Sustainable | 2.5% | 11.0% | 7.8% | -25.5% | -0.5% | 4.4% | -1.5% |
| Global Corporate Bond Sustainable | 0.4% | 4.2% | -3.0% | -6.0% | -3.3% | 3.4% | -1.0% |
| Global Green Bond | 1.2% | 4.7% | -2.8% | -13.7% | -5.7% | 3.1% | -3.1% |
| Global Renewable Energy | 3.2% | 8.5% | 2.3% | -4.0% | 32.4% | 5.7% | 8.3% |
Source: Morningstar sustainable indices in GBP. Net income reinvested. Past performance is not a reliable indicator of future results
The positioning of our Ethical strategies
Cautious
Growth
Balanced
Adventurous
Disclaimer
Opinions constitute our judgment as of this date and are subject to change without warning. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment. Past performance is not a reliable indicator of future results and forecasts are not a reliable indicator of future performance. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down. The information in this document is not intended as an offer or solicitation to buy or sell securities or any other investment, nor does it constitute a personal recommendation.