Our mid-year global outlook
As we reach the halfway point of the year, it’s the perfect time to take stock and look back at what’s happened so far. It also provides us with the ideal opportunity to look forward at what markets may bring over the next six months and beyond.
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The half-time market summary
The outlook for markets in 2024 and beyond
The views of our investment partners
In this mid-year outlook, our Chief Investment Officer, Marcus Brookes, offers his thoughts on the first six months of the year, and our Investment Strategist, Lindsay James, shares her views on the current investment landscape and what may lie ahead for investors. We also bring you insight and expertise from a selection of our investment partners across the key asset classes and regions. Please click on the images below or use the menu in the top right of your screen to read more.
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Technology leads a surge in the US
In the first two quarters of 2024, US equities surged 15.8%. The Magnificent Seven were especially prominent amid unrelenting investor appetite for artificial intelligence (AI) exposure. Nvidia led the US through numerous new all-time market highs as it grew to become the world’s most valuable company. Technology stocks led the field, with communication services and financials stocks also prospering. The sectors more sensitive to interest-rate changes struggled, such as real estate and utilities. Energy stocks made progress in the first quarter only to retreat in line with oil prices in the last three months.
A tale of two quarters
European equities returned 7.1% in the first half of the year with most of this return generated in the first quarter. The second quarter was flat overall, despite a strong rally in May due to the anticipation of a June rate cut by the European Central Bank. This boosted interest-rate sensitive areas, such as real estate and utilities. In Europe, as in the US, tech stocks were the biggest winners. Financials, consumer discretionary, and industrials stocks also made gains due to steadily improving economic data and declining inflation, which boosted cyclical stocks. More defensive areas, such as utilities, consumer staples, and real estate generally trailed, while energy stocks struggled with lower oil prices.
Led by a booming US, developed markets gained 13%, compared to 8.6% for emerging markets. Even so, emerging markets outperformed the UK, Europe, and Japan, each of which returned a little over 7%. In the ongoing story of growth vs value, growth stocks delivered 18.4%, more than double the 7.5% gain seen by value stocks. Meanwhile, in the fixed income space, both US Treasuries and UK gilts suffered losses. Corporate bonds were mostly flat for sterling investors during a period most notable for its constantly shifting interest-rate expectations.
In the first half of the year, the ongoing investor mania for the artificial intelligence story, improving economic data, and the first interest-rate cut from a major central bank helped global equities return 12.5%.
Half time scores for 2024
Year-to-date returns by asset class and region.
Source: Quilter Investors as at 30 June 2024. Total return, percentage growth in pounds sterling except where shown, rounded to one decimal place. The performance shown for global equity markets is represented by the MSCI AC World Index; developed markets by the MSCI World Index; US equities by the MSCI USA Index; European equities by the MSCI Europe ex UK Index; UK equities by the MSCI United Kingdom All Cap Index; UK smaller companies by the MSCI United Kingdom Small Cap Index; emerging markets by the MSCI EM (Emerging Markets) Index; Chinese equities by the MSCI China Index, US Treasuries by the ICE BofA US Treasury (GBP Hedged) Index; UK gilts by the ICE BofA UK Gilt Index; and sterling corporate bonds by the ICE BofA Sterling Corporate Index.
Marcus Brookes
Chief Investment Officer
UK equities returned 7.3% thanks partly to the economy exiting a shallow recession and headline inflation retreating to the Bank of England’s 2% target. The progress on inflation was sufficient for the UK’s Conservative government to call a snap General Election. This was followed by news that UK economic growth in the first quarter had been revised upwards, from 0.6% to 0.7%, making it the highest of the G7 countries. The bids for some of the largest UK stocks such as the mining giant Anglo American, Royal Mail, and the engineer, John Wood Group, highlighted the low valuations for UK stocks. Record bids for UK smaller companies also highlighted this. Boosted by periods of sterling weakness against the US dollar, cyclical areas like financials, industrial, and energy companies outperformed. Healthcare and consumer staples stocks also outperformed, thanks partly to their high dollar revenues.
US dollar strength benefits UK equities
Overall, emerging markets gained 8.6%. Taiwan was the top performing emerging market thanks to its high technology weighting. Turkey was close behind as a series of interest-rate hikes were taken to signal a return to conventional monetary policy. Peru saw strong gains thanks to interest-rate cuts, while India, Poland, and Malaysia were also among the winners. Middle East markets declined in line with the oil price as regional tensions grew. Latin American markets generally struggled in the face of US dollar strength and the ‘higher for longer’ line on interest rates from the US Federal Reserve. The worst performers included Brazil, Qatar, Indonesia, and Mexico, all of which suffered double-digit losses, although Egypt was the biggest casualty with losses above 30% as the currency plummeted.
A mix of winners and losers in emerging markets
UK gilts were down 2.9% in the first half of the year. This was despite the UK Consumer Prices Index (CPI), also known as headline inflation, dropping to the Bank of England’s 2% target in the 12 months to May 2024. Meanwhile, US Treasuries declined 1% in the period. This was mainly because markets went from pricing-in six US rate cuts at the start of the year to just one by the end of June.
Ongoing struggles for fixed income
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Developed markets are generally regarded as those with mature industrialised economies, robust infrastructures, and strong political and legal systems such as the UK, Europe, the US, and Japan. This is in contrast to emerging markets.
Emerging markets are developing economies that are in the process of transitioning into becoming developed markets by evolving their industries, infrastructure, and political and legal systems.
Growth stocks tend to be younger companies that derive their value from the rate at which they’re expected to grow their future earnings. Generally, they pay limited dividends as they reinvest their profits to grow their businesses.
Value stocks tend to be well-established, mature businesses. They are companies whose share price is low relative to their value. Consequently, value stocks are among those with the highest dividend yields.
Treasuries are US government bonds. They are issued by the US Treasury.
Gilts is the name given to bonds issued by the UK government.
Corporate bonds are bonds issued by companies. They are generally riskier than government bonds, so corporate bonds normally offer higher interest rates (or yields) to compensate for the additional risk.
Magnificent Seven is a term used to describe Amazon, Apple, Alphabet, Meta, Microsoft, Nvidia and Tesla. They are also referred to as mega-caps.
Consumer discretionary companies provide goods and services that consumers consider non-essential, but highly desirable if their income allows. Consequently, consumer discretionary companies tend to be the most sensitive to economic cycles.
Consumer staples companies provide goods and services that are always in demand. Consequently, they are referred to as being non-cyclical or defensive companies and are favoured by investors when economic growth declines.
Sterling weakness is when sterling falls relative to another currency. For example, if a sterling investor holds a US dollar investment, and sterling falls relative to the US dollar, the return from the investment will increase.
Cyclical refers to companies and sectors whose fortunes are closely linked to the economic cycle. This means their revenues generally rise during periods of economic growth and fall during recession.
The US Federal Reserve, commonly known as the Fed, is the central bank of the United States of America, it operates in a similar way to the Bank of England in the UK.
As we enter the second half of 2024, it’s a good time to assess the terrain and see what lies ahead for investors.
We started the year mindful of a risk of a slowdown in the global economy. This was mainly because of the huge task that central banks faced in bringing down stubbornly high inflation. However, as the months have progressed, we have become more optimistic that a US recession (and the impact that would have globally) can be avoided in the near term. So far this year, unemployment has remained at modest levels and wage growth has generally been higher than inflation. This has boosted real incomes and consumer demand. As a result, the fall in inflation has slowed and meant that interest rates have been kept at higher levels, in contrast to market expectations. Despite this, the overall strength of the global economy has more than offset concerns about fewer interest-rate cuts in the remainder of 2024.
Lindsay James
Investment Strategist
Indications for global growth look reasonably positive. The UK and Europe both appear to have turned a corner, with growth expected to continue picking up through 2024 and 2025, although from a low level. Because of labour shortages, wages continue to grow meaningfully higher than inflation. This, along with interest rates beginning to come down, is likely to feed through into stronger consumer spending. Meanwhile, the outcome of the recent UK election has given Labour a very strong mandate to reprioritise and reshuffle existing spending and taxation. Whether this encourages more investment to support the UK economy will depend on details that are yet to be shared. However, the energy and vision of a new centrist government that enjoys wide-ranging support could be a good starting point for the UK economy.
Growth is expected to pick up for UK and Europe
We expect the US to experience a modest slowdown as higher interest rates have begun to bite. This is due partly to people finally having spent their pandemic savings and job openings reducing to more normal levels. However, providing US inflation continues to fall, a cooling US economy would make interest-rate cuts more likely. This would be a positive backdrop for global financial markets. It’s equally important to consider that despite the US economy slowing, it is still expected to grow at a meaningfully faster pace than either Europe or the UK. We are also aware that the potential return of Donald Trump to the White House creates uncertainty, particularly given that he cannot repeat the policies of his first term by further cutting taxes. He may also end support for Ukraine and introduce stringent import tariffs with potentially significant consequences for global markets and the wider economy. Another factor will be the dominance of the ‘Magnificent Seven’. Whilst these enormous businesses are generally extremely profitable, the risk of periodic disappointment rises with investor expectations, against what is now a very high bar.
A modest slowdown for the US
Elsewhere, China looks set to see its recent export boom challenged. This could potentially impact its growth outlook at a time when domestic consumer spending remains weak and the property market continues to contract. Sweeping tariffs on various Chinese exports have been announced by the US, Europe, Turkey, and Latin American countries. This is likely to increase pressure on Beijing to not only retaliate, but also to provide stimulus in other ways, such as interest-rate cuts. However, China’s challenges are providing opportunities to other countries in the emerging markets sphere, with supply chains often shifting in their favour.
Issues for China leads to opportunities for other emerging markets
Fixed income in developed markets has so far been challenged this year by the Fed’s policy to keep interest rates ‘higher for longer’. The Bank of England has also delayed rate cuts, but is now expected to make a maximum of two rate cuts in the second half of the year which would help push bond yields down, and therefore prices higher. The outlook for UK gilts still faces a number of risks, with UK inflation likely to drift higher again as the year progresses, and a new government setting the Budget. However, there are factors offsetting these risks. Current yields for UK gilts and US Treasuries are higher than they have been in recent years. This means that should growth unexpectedly slow down, providing inflation is still on track, rates could be cut. In this instance, bond yields would likely fall, and bond prices would rise. This would provide bond investors with diversification benefits from the potential impact on share prices from lower growth.
A role to play for fixed income
Overall, the current outlook is a reasonably positive backdrop for investors. This is due to an expectation that inflation in developed markets will fall in the months ahead and interest rates will potentially come down. This will reduce economic headwinds and typically boost the value of financial assets. With that in mind, we are optimistic about the remainder of 2024, whilst remaining mindful of ongoing risks.
A reasonable backdrop for investors
Yield is a measure of the income an investment delivers. It is calculated as a percentage of either the original purchase price or the current market value of the asset in question.
A central bank is the institution tasked with managing a country’s currency on behalf of the government. It enforces monetary policy by setting interest rates that are appropriate for its economy and its mandate as a central bank.
We have harnessed the expertise of a selection of our investment partners to bring you their specialist insight on the outlook for some of the key asset classes and regions.
UK equities
European equities
Emerging markets equities
Global equities
Precious metals equities
Fixed income
Emerging market equities "We remain attracted to emerging markets for a multitude of reasons. Some of these include the attractive growth differential between emerging and developed markets, loose monetary policy within emerging markets, favourable relative valuations to developed markets, the potential diversification benefits of owning emerging markets, and the long-term tailwind of artificial intelligence within emerging market economies. "From a regional perspective, many countries stand to benefit from a plethora of structural growth tailwinds. For instance, Taiwan is witnessing a strong semiconductor supply/demand outlook aided by artificial intelligence driving new product cycles and the rise of machine learning. China, whose companies are trading at attractive valuations, could see a boost from supportive government policies that strengthen the overall economic climate. India is delivering impressive structural growth, fueled by long-term capital expenditure. Countries like Korea are poised for price-to-earnings multiple expansion. In Korea’s case, this is driven by its ‘value-up’ initiative - a program designed to unlock the true potential of its listed companies. "Notwithstanding the many tailwinds mentioned, emerging market equities are fluid and prone to external shocks. Therefore, we believe that resilient companies who generate strong shareholder returns are best suited to navigate the changing tides going forward."
Investment adviser to the Quilter Investors Emerging Markets Equity Income Fund
Alison Shimada
European equities "Political uncertainty is part-and-parcel of European equity investing and the second half of 2024 will no doubt see surprises. However, it shouldn’t distract from the main narrative – namely the strong valuation argument versus the US, and the global nature of European-domiciled businesses. "For us, the more important question is whether growth will continue to be driven by a narrow set of top performers situated in specific industries like AI, technology, healthcare, building materials, and aerospace – or whether the market shifts to reward the current underperformers. We have recently seen signs of the latter, with the market warming to a 'Goldilocks' (just right) scenario of interest-rate cuts in 2024, combined with no recession. "If this trend sticks, the more cyclical, economically-sensitive sectors, such as oil, mining, and chemicals, become attractive. Pragmatism will clearly play a crucial role when managing any sustained market-regime change effectively. "In the meantime, it is important to remember that Europe is not just a domestic story and there are strong long-term prospects for the global winners. Those companies - in semiconductor equipment, construction materials, aerospace, industrials, and other sectors – that happen to be listed with a European postal address but stand to benefit from a global recovery."
Investment adviser to the Quilter Investors Europe (ex UK) Equity Fund
Tom O'Hara
UK equities "Although the domestic situation is only of modest importance to many UK companies, for international investors the health of the UK economy plays an important role in their thinking when analysing UK equities. "The UK economy has continued to perform better than expected, and in doing so has defied a narrative that has been consistently gloomy for some time. Sterling has been relatively stable of late, and political risk in the UK has fallen considerably since the tumultuous events of the autumn of 2022. "The fact that increasing numbers of international investors are showing up on UK shareholder registers – not just in the larger global businesses listed here in London but also in the more domestic areas of the market – suggests that sentiment is beginning to change. This also corresponds with the recent acceleration of bids for UK companies, a trend we believe will continue, given large parts of the market remain materially undervalued versus international peers. Record share buybacks are a powerful catalyst, too. As a result, we see tangible evidence that conditions surrounding the UK market are beginning to improve, and UK equities are on the way to closing the performance gap of recent years."
Adrian Frost
Investment adviser to the Quilter Investors UK Equity Large-Cap Income Fund
Global equities "Trees don’t grow to the sky. Increased equity market concentration and rising valuations do not persist forever. This holds true, even in the unlikely event that the current consensus view of an AI-driven rally in markets continues for the short-to-medium term. An increased sense of certainty in future outcomes only serves to increase risk. "A range of outcomes remains possible from here, from recession, if rates stay higher for longer, to a return of inflation if rates are cut too soon. This means that the driver of total returns, over the medium term, is most likely to shift from solely being driven by capital gains to that of compounding of income. "Yet currently investors are obsessed with capturing the upside of the artificial intelligence theme and are no longer concerned about a potential fall in stocks related to AI. Traditional drivers of total return will again become important – compounding of a durable dividend that can grow to accommodate inflation, lower volatility, and valuation discipline. At a time where today’s market behaviour has resulted in investment theses creeping into a crowded herd, having a disciplined process to avoid this herding should become increasingly appropriate going forward, whatever outcome transpires."
Investment adviser to the Quilter Investors Global Equity Value Fund
Nick Clay
Precious metals equities "The gold price has risen substantially over the past 18 months, bolstered by strong central bank demand and robust physical demand in Asia. Our medium-term base case is for gold to continue trending gradually higher as we see structurally higher geopolitical risk, stickier-than-expected inflation, and rich broader equity market valuations - all strong reasons for having exposure today. "However, considering the move in the gold price, the performance of precious metals equities has been somewhat disappointing. The primary reason is that producers have experienced significant inflation in costs over the past three years, meaning that higher gold prices haven’t translated into the profit margin expansion one might have expected. Another factor has been that gold equities appear to have been out of favour with investors, highlighted by outflows from active and passive gold equity funds. "Looking ahead, we believe the worst of the cost inflation is behind us. Meanwhile, in our experience, the time to get more positive on gold equities is when sentiment is severely depressed. At current gold prices, producers are generating strong levels of free cashflow and it will be key where they put this to work, so we see the upcoming quarterly reporting season as particularly important."
Investment adviser to the Quilter Investors Precious Metals Equity Fund
Tom Holl
Fixed income "We are of the opinion that higher-for-longer interest rates will be a feature of markets in the medium term. This will be driven by relatively expansionary fiscal policy, leading to consistently strong wage gains, which will lead to, on average, above-target inflation. "Nonetheless, we expect to continue to get inflation-busting real returns from corporate bond markets and with relative safety, particularly in investment-grade bonds. The same cannot be said for some highly leveraged, high-yield companies and we expect an ongoing default cycle in the high-yield part of the market, which will last for some time. Against this, we continue to expect high quality financials to be a part of portfolios, given they are benefiting from higher interest rates. "The fortunate thing for investors in fixed income is that this is an asset class in which there are many ways to do things. Given the ability to get solid, real returns from investment-grade companies without taking on a great deal of price risk from either duration or credit, then the compounding effect these real yields can offer, with relatively low volatility, makes the asset class very attractive over the medium term. In short, it’s all about compound interest now!"
Investment adviser to the Quilter Investors Corporate Bond Fund and the Quilter Investors Diversified Bond Fund
Lloyd Harris
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