Diversification in an uncertain world

During Q2, markets had to contend with a slew of unexpected political events globally. In the UK, a general election was called for 4 July, triggering an examination of competing parties’ tax and spend priorities. In Europe, the European parliamentary elections delivered a market-unwelcome shift to the political right in France. That catalysed an unexpected snap French parliamentary election, where the risks of a far-right party gaining power in a G7 country drove sharp falls in French banking stocks. 

Meanwhile, in the US, June saw a criminal conviction of a past president, Donald Trump, for the first time in US history. Despite this, the expected Republican presidential challenger continued to narrowly lead Democrat President Biden in the polls ahead of a November election later this year. During Q2, investors were also at times wrong-footed by unexpected market volatility around election results in India, South Africa, and Mexico.

Weighing against the negative of such political uncertainty, at a fundamental level, the tailwinds that have supported markets so far this year continued in Q2. Company earnings painted a constructive picture, with data from FactSet showing US companies reporting earnings ahead of consensus expectations at a rate above longer-term averages. 

Supporting our thematic, longer-term, through-the-cycle investments in technology and healthcare, these two sectors delivered the highest percentages of companies reporting earnings above estimates. Encouragingly, while markets have been led narrowly by technology stocks through 2023 and early 2024, during Q2, we saw some tentative signs of a broadening out of sector performance. April and May saw more confidence in the outlook for a wider set of stocks, though June saw technology back on the front foot. 

That is not to detract from the continued meteoric rise of Nvidia, the US-listed generative Artificial Intelligence semiconductor designer, which briefly became the world’s biggest company in June. Valued at more than US$ 3 trillion in mid-June, Nvidia’s size was bigger than all of the companies in the UK FTSE 100 equity index combined.

At a fundamental level, the tailwinds that have supported markets so far this year continued in Q2.

From an economic perspective, belief in a ‘goldilocks’ soft-landing scenario, where higher interest rates bring down inflation without derailing economic growth more broadly, continued in Q2. Since our last quarterly report, the global central bank interest rate cutting ‘juggernaut’ tentatively started. Following Switzerland’s rate cuts in March and again in June, central banks across Sweden, Canada, and the eurozone cut interest rates for the first time in their respective monetary policy cycles. However, while underlying inflation readings have generally continued to moderate, the disconnect between falling and low goods inflation versus stickier services inflation has persisted. In late June, Australia’s central bank even contemplated a rate hike. Closer to home, the UK’s all-items annual inflation rate of 2% for May masked a services inflation rate running at 5.7% year-on-year.

If not monetary policy, it is fiscal policy that is arguably currently boosting economies and markets. Advanced economies are enjoying unemployment rates still reasonably close to historically low levels, wage rates are running above pre-pandemic averages, and economic growth estimates are still generally constructive. Despite this, governments are spending pro-cyclically, with government spending exceeding tax revenues.

On both sides of the Atlantic, the US and the UK have been running budget deficits (as a share of Gross Domestic Product, GDP), at around 6.3% in calendar year 2023 and 4.5% for the financial year 2023-24 respectively. While this cannot last indefinitely, this scale of government support arguably explains in large part the resilience of the consumer and corporate outlooks in turn.

This is the economic and market landscape that we currently find ourselves in. Coupled with ongoing geopolitical uncertainty, with war in Ukraine, conflict in the Middle East, and ongoing tensions in Taiwan-China, it feels like a more uncertain world than usual. With such a backdrop, it is by staying invested but keeping balance through a well-thought-out diversified asset allocation, that we aim to continue to help you target your own investment goals.

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