Sasfin Global Equity Model - Quarterly Review - Q2 2024

Watch below as Sasfin Wealth’s Global Equity Analyst, Jonathan Wernick, and Chief Investment Officer, Craig Pheiffer unpack some of the headwinds currently facing markets: 

Despite a rocky start to the quarter, global equities were able to regain their positive momentum as the MSCI ACWI Index ended the period 2.9% higher.

The positive result was largely driven by stocks within the Information Technology and Communication Services sectors, specifically those perceived to be the early–on “winners” of the Artificial Intelligence (“AI”)  mega-trend that continues to encapsulate the minds of market participants. The winners, as the market perceives them today, are those within the hardware and infrastructure segment. Key beneficiaries include semiconductors, networking equipment for data centers as well as edge devices expected to be equipped with AI capabilities such as personal computers and smartphones.

AI computing consumes a significant amount of electricity. Stocks within the Utilities sector, especially those with nuclear power capabilities, experienced sharp rises in their stock prices as markets anticipate a surge in demand for electricity.

The debate continues to rage on as to when the US Federal Reserve (“Fed”) will begin to cut interest rates. The May inflation print of 2.6% maintained the overarching trend of falling price levels and will only serve to further pressure the Fed to pull the trigger. US Bond yields ended the quarter relatively unchanged from the start as US 2-year and 10-year yields ended June at 4.7% and 4.3% respectively.

High levels of interest rates continue to place strain on consumers, as spend, particularly for discretionary items, has begun to slow. Stocks within the Consumer Discretionary sector were notable underperformers during the quarter as belt tightening has begun to take its toll. Unlike the US, a number of central banks in Europe have not been shy to cut interest rates. The Swiss National Bank cut rates for the second time this year, and the European Central Bank cut its deposit rate for the first time in five years.

Falling rates would ordinarily be viewed as a positive for equity markets but performance by European equities was mixed during the quarter. The industrial-heavy German Dax Index (-1.4%) underperformed as German automakers continued to suffer at the hands of EV imports from China. The parliamentary election in France, which could see the business-friendly centrist president Emmanual Macron lose power, spooked market participants, leading to sharp declines in French stocks and leaving the French CAC Index (-7.1%) in negative territory at the end of the period. On a more positive note, the Netherlands AEX Index (+6.0%) outperformed during the period, owing to sizable contributions from local semiconductor stocks.

Despite the Bank of England resisting the urge to cut rates, the FTSE 100 Index (+3.7%) was a relative outperformer. Investors continued to bargain hunt within the region, weighing up the impact of a regime change as the Labour Party looked set to come into power for the first time in 14 years.

Asian markets (ex. Japan) were the standout performers during the quarter with Taiwanese semiconductor stocks notable contributors. Hong Kong-listed Chinese equities also rebounded which led the Hang Seng Index (+9.2%) higher. Cyclicals, such as financial and energy stocks, were boosted by the news of the Politburo outlining new measures to address the faltering property sector. The release of better-than-expected economic data points, economic growth and industrial production, served to boost positive sentiment. Chinese tech giant Tencent was also a notable contributor after reporting better-than-expected earnings.

China aside, cyclicals were relative underperformers during the quarter. The Materials sector was weighed down by disappointing results from industrial gas counters as well as a sizable drop in steel prices which negatively impacted counters within the segment. Energy counters were pegged back as a combination of weak economic data points, rising inventories and a strong US dollar, saw the prices of Brent crude and WTI slip by 2% to $82 and $85 a barrel respectively.

Central bank purchases of gold continued to push the price of bullion higher. The yellow metal ended the quarter above the $2,300/ozt (+5.5%) level owing to the prospect of lower interest rates as well as concerns around the staggering levels of national debt.

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