In this regular piece, we summarise the key headlines from the quarter that have impacted investment performance. Feel free to download and share it directly with your clients or read our interpretation below for further commentary.
China’s policy changes
China’s central bank has cut interest rates in its boldest move in recent years, to revive slowing economic growth and support property owners. The People’s Bank of China reduced mortgage rates by 0.5 percentage points and lowered bank reserves to encourage lending. These measures aim to support up to 50 million households. Although the policies may be insufficient to reignite demand, reports indicate there could be further interest rate cuts expected this year.
The Rise of Kamala Harris
With the U.S. presidential elections quickly approaching, the political landscape has shifted following Joe Biden’s decision to step aside from the race. Vice President Kamala Harris is making history as she campaigns to be the first woman president. Her surge in popularity has empowered Democratic voters, driving record-breaking donations and positive media campaign coverage. Although elections can sometimes fuel market volatility, they may not dictate long-term stock trends, making this moment one to watch.
The positive UK consumer outlook
In Q3, UK consumer spending grew, driven by improving economic conditions including inflation returning to target and positive consumer sentiment. Reports also highlighted a housing market revival. Key factors like improving mortgage rates, easing living costs, and stronger household incomes were cited by experts as supporting the recovery. These developments suggest an opportunistic outlook for the UK as it navigates ongoing challenges.
Interest rate cuts in the US & UK
The Bank of England and the US Federal Reserve both initiated their rate-cutting cycles in Q3 2024, the BoE cut rates by 25 basis points in August. The Fed followed with a more aggressive cut by 50 basis points in September. Basis points are used to describe incremental interest rate changes for securities and interest rate reporting. However, their approaches differ, with the BoE expressing caution due to inflation and advocating for gradual rate cuts, while the Fed has taken a more decisive stance, focusing primarily on supporting the labour market rather than inflation. These contrasting approaches have influenced the GBP/USD exchange rate and are expected to continue to do so in the coming months.
The Yen’s appreciation
During the summer, the Japanese yen became a key focus in the markets as it experienced a significant rebound. The currency’s impressive 12% increase over the past three months marked its best quarterly performance since Q4 2008, effectively recovering most of its year-to-date losses. The Bank of Japan has taken steps towards policy normalisation, raising interest rates to 0.25% in July.
David Aujla (DA), who is lead manager of our Summit Growth and Responsible ranges and who co-manages our Model Portfolio Service, alongside MPS Portfolio Manager Ben Gutteridge (BG) and Fabio Faltoni (Product Director, Multi-Asset Strategies (MAS) UK team) share their thoughts on the key developments of the last quarter and how they’re affecting the portfolio management of their respective products.
It’s been an emotional few months for supporters of both the Labour Party and 90s Britpop. For the ‘Mad for it’ fans of the Gallagher brothers, news of their reconciliation and concert schedule, after 15 years of absence, brought first euphoria, only to flip (largely) to abject misery as ticket demand and website chaos left millions emptyhanded. Similarly, after 14 years on the political sidelines, the Labour Party returned to power with a thumping majority in July, to the cheer of millions of left leaning factions, and soft applause from disgruntled Tory voters. But again, the sense of optimism was all too brief. In part, disfavour was found in somewhat lavish gifting practices, darkening the Party’s ‘anti-Tory/anti-Scandal’ image. Though perhaps of even greater distress has been the early intent to share messages of prior economic mismanagement and the rather austere regime which lay ahead. Given such rhetoric, polling numbers faded fast, encouraging Rachel Reeves to strike a (marginally) more optimistic tone. However, given the increasing tax burdens which are most surely to come, coupled with the ongoing headwind of high interest rates, it is of little wonder consumer and investor confidence remains so downbeat.
Yet despite this gloom, there are plenty of reasons to believe the UK economy may soon return to the sunshine. The jobs market remains in good shape with the number of employed workers at near all-time highs, and wages currently rising faster than inflation. Interest rates too, whilst still at high levels, have seen their first cut, and with more expected in the months ahead. We also note the aggregate level of savings is relatively elevated for UK consumers, offering a solid platform for future spending, should confidence return. And perhaps politics may yet play a role in helping to deliver on that? Of course there are risks, but a commitment to invest for growth, closer ties to Europe, and the (potentially) more efficient delivery of public services may turn things around for the troubled new leadership. UK equity investors should also note the valuation appeal reflecting these downbeat expectations, as well as the comforting nature of higher dividends, which can extend some patience whilst we await clearer evidence of economic resurgence. For Oasis fans, however, it’s harder to strike a more positive tone. All we can hope for is a more frequent return to the live scene helping to satisfy insatiable demand and prevent so many loyal fans from looking back in anger.
Following an abysmal performance in the first televised Presidential debate, the writing was on the wall for the struggling President. Besieged from all sides by baying opposition, internal mutineers and Hollywood royalty, Biden’s time was almost up. Indeed, perhaps the most striking explanation for the delay, was the absence of conviction in a replacement candidate. As it was, the fear of a floundering Biden soon forced the hand of the Democrat leadership. With only a brief flirtation with the suggestion of a contest, Kamala Harris was quickly elevated to the position of candidate; and she has not looked back since. Managing to offer herself up as an authentic ‘change’ candidate, despite being 2IC in the current regime, Kamala has gone beyond just smiles to show her genuine leadership credentials. Not only has she convinced some heavy weight financiers to back her campaign, she has nonchalantly moderated on some of her more progressive positions (such as fracking and guns), to capture more of that middle ground, and rendering her as favourite to secure the Presidency.
Of course, it’s not just Kamala’s efforts that have been the key to her success, she owes much gratitude to former President Trump. Failing to attack Kamala Harris on her own record in office, particular over inflation, it was this Trump who greatly underperformed in the only TV debate between the pairing. Choosing instead to raise the mythical (and abhorrent) claim of pet eating migrants, Trump’s chances of victory took a material blow. Yet despite these swings, and a new favourite, the outcome remains in the balance; still approximating (to the nearest 10) to a 50/50 call.
As investors we follow the polls and news closely, but also know not to place too greater stock in predicting the outcome, or in determining how a winner might influence investment strategy. Personally, I tend to recoil a little at those who propose one side or the other could be so supportive or damaging for share prices when there is so much more to consider; such as where we are in the business cycle, monetary policy and valuations. The US economy is also incredibly dynamic and cohesive, breeding endless innovation to make life ever more convenient and productive. No doubt the market could have a tantrum over the prospect of a meaningful tax hike, or a tariff imposition, but it’s very risky to bet against the US economy and its vibrant corporate sector adjusting to a new framework both quickly and profitably.
It’s quite remarkable that a thumping 0.5% interest rate cut from the US Federal Reserve, and the first since the pandemic-induced inflation spike, is not considered the most positive market event in the quarter. This subordination, however, merely reflects the significance of Chinese policy decisions taken in late September. In a widely unexpected move, the People’s Bank of China unleashed a policy blitz aimed at reviving their flagging economy, including discounts on existing mortgages, a reduction in bank lending rates and explicit liquidity support for stock markets. Quite rightly many question the efficacy of such policies given the provision of cheaper credit may be of little interest to weary consumers, brow beaten by housing market woe. In such despair, any windfall bestowed upon individuals and corporates may just be used to pay down debt rather than spent into the economy. On that basis, hopes for a swift economic resurgence may soon be dashed. However, this does not mean the investment opportunity is equally vulnerable. As we saw with the overnight removal of the ‘zero-covid’ policy, this leadership (leader) is willing to take bold steps when the time is considered right. Given the coordination of these policies, and the implicit reference to the open-ended nature of them, it appears a line in the sand has been drawn on how much economic pain this leadership is willing to deliver. Whilst this may not be a Mario Draghi (Former ECB President) “Whatever it Takes” moment, given the firm intent behind these policies, coupled with the apparent willingness to do more if needed, this ‘could’ still be an historic step. Investors should also note the valuation appeal of the Chinese market, even in light of dramatic and positive reaction to the news flow. Of course there are numerous risks which plague this asset class, but how welcome it is to be framing a Chinese conversation in a more positive light.
The Japanese yen was a key focus in financial markets during the third quarter, as it experienced a significant rebound after reaching its lowest level against the US dollar since 1990 by the end of June. The currency's impressive 12% increase against the USD in Q3 was its best quarterly performance since Q4 2008, helping the currency recover most of its year-to-date losses. This resurgence can be attributed to diverging monetary policies between the Bank of Japan (BoJ) and the US Federal Reserve (Fed) and most importantly a weak payroll report in the US that led to heightened US growth fears.
The BoJ has taken steps to normalise policy, raising the base rate to 0.25% in July. While rates remain low compared to other developed markets, the BoJ is gradually shifting away from the ultra-accommodative stance Japan has maintained for decades. Additionally, the BoJ announced plans to taper its bond purchases, further indicating a tightening bias in contrast to the Fed's more dovish stance.
The yen's upward momentum was further boosted by the rapid dismantling of carry trades and as investors rushed to find JPY quickly, Japanese stocks were sold heavily. Calm has returned to Japanese stocks and the currency since then. While the attractiveness of carry strategies funded by the Yen are a little less attractive than they were in Q2, there is still a wide rate differential between Japanese rates, and rates elsewhere. From here, JPY is likely to see some further strength against the USD but we don’t think the coming months will see the same scale of moves as we saw in Q3.
In our Multi Asset portfolios, we do not take active views on currency movements. However, our inclusion of unhedged Japanese equities has the potential of generating favourable outcomes overall. This is because a stronger yen typically provides a positive currency translation effect for international investors holding unhedged positions. Historically, a stronger yen has often been viewed as a challenge for Japan's export-driven stock market, potentially impacting corporate profitability. However, this traditional inverse correlation between the yen's value and Japanese equity performance has noticeably weakened in recent years as many Japanese companies have successfully diversified their revenue streams globally, thereby reducing their vulnerability to yen fluctuations. It is the improving strength of the domestic story in Japan that can help both the JPY and Japanese stocks move higher in the coming months in our opinion.
Both the Bank of England (BoE) and the US Federal Reserve (Fed) kicked off their rate cutting cycle in Q3. The BoE went first in August with a 25bps cut and was followed by the Fed in September with a 50bps cut. While both have started cutting rates, the tone from the BoE and Fed has been a little different. The BoE remains concerned about sticky services inflation and is talking up a gradual approach to cutting rates. In contrast, the Fed is acting more decisively, not only with a larger initial cut but also with a shift in language that shows the Fed’s focus is very much on the labour market and now less on inflation.
Headline inflation has decreased in both countries, but core inflation remains stubbornly higher in the UK (3.6%) than the US (2.7%). Services inflation remains particularly sticky in the UK too and is a key datapoint the BoE considers when setting monetary policy. The UK's tighter labour market, with lower workforce participation and higher bargaining power for workers has contributed to more persistent inflation. In contrast, the US has seen workforce expansion through increased migration and domestic participation which helped cool wage pressures.
The central banks' distinct mandates also play a role. The BoE focus is on maintaining price stability at the 2% target over the medium term, with employment and economic growth as secondary considerations. The Fed's dual mandate of maximum employment and stable prices allows for more flexibility in responding to labour market conditions. These factors suggest that the BoE faces a more challenging situation regarding potential rate cuts, while the Fed may be more inclined to implement faster or more aggressive cuts if labour market conditions warrant such action. That is very much reflected in market pricing for policy rates over the coming year.
Market pricing suggests that the Fed will continue to ease more quickly than the BoE. The Fed is expected to get rates to a 'neutral rate' of approximately 3% more quickly. We are not convinced this is the right way to think about the path of policy rates and ultimately believe the BoE will ease more quickly than is currently priced as greater resilience in the US economy is likely to mean fewer cuts from the Fed in 2025 than is priced.
While multiple factors influence currency valuations, the contrasting approaches to monetary policy by these two major central banks have emerged as a key driver in determining the direction of the GBP/USD exchange rate in recent months. A less dovish BoE and more dovish Fed has meant sterling has appreciated against the USD. Future monetary policy decisions are expected to play a role in shaping the trajectory of this important currency pair, but we also see the UK economy being more sensitive to interest rates. As mortgage rates fall consumer confidence is likely to improve and growth in the UK should improve. Therefore, GBP has scope to gradually move higher against the USD in the coming months.
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The Global stock market accrued further gains in October, however, this aggregated statistic belied mixed performance beneath the surface.
Learn how multi-asset funds can help manage UK CGT liability and reduce risk in market uncertainty. Find out more.
Global stock markets accrued impressive gains through September, rounding out a positive, if emotional, 3rd quarter for investors.
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
All information as at 30 September 2024 and sourced by Invesco unless otherwise stated.
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