Sasfin Global Equity Model - Quarterly Review- Q3 2024

Global equity markets experienced another positive quarter as the MSCI All Country World Index gained 6.6% during the period. The gain came in spite of the unwinding of the Japanese yen carry trade which briefly threatened to derail markets. Years of ultra-low interest rates in Japan allowed traders to borrow in Japanese yen and invest in a currency that offers a higher return. For many such traders, US technology stocks became a favoured destination. The trade appeared to be working quite nicely until the recent surge in the yen after the Bank of Japan raised interest rates for the first time in 17 years.

The unwinding of the carry trade partly accounts for the relative underperformance of the Information Technology sector during the quarter. An additional headwind during the quarter has been the growing concern around the enormous spend on capex by large cap technology firms related to artificial intelligence (“AI”).  In stark contrast to more recent quarters, technology stocks associated with the AI theme had led markets higher but now some have begun to question the potential return to be had from such a sizable investment. As such, Big Tech and semiconductor firms which are at the epicentre of this AI capex wave, were notable laggards during the quarter.

The buildout of AI infrastructure (data centers) is likely to lead to a sizable increase in electricity demand as AI compute is incredibly power intensive. Market participants are clearly expecting utility companies to profit from increased electricity usage, as reflected by the strong performance of the Utilities sector.

An additional tailwind for the Utilities sector was the decline in interest rates. The US Federal Reserve (“Fed”) finally cut interest rates, signalling that further cuts lay ahead. Utilities as well as the Real Estate and Consumer Staples sectors are considered bond proxies as they provide steady, predictable income through dividends. Market participants tend to view stocks within these sectors favourably in an environment of falling interest rates as they offer bond-like returns. Other beneficiaries of falling rates were the insurance companies within the Financials sector. Many insurers continue to report improvements in the claims environment as well as sizeable premium increases passed onto consumers.

The US 2-year and 10-Year bond yields ended the quarter lower at 3.79% and 3.64% respectively. For the first time in over two years, the longer-term yield rose above its shorter-term counterpart. 

While most major economies around the world have embarked on a cycle of rate cutting, US bond yields have fallen at a relatively sharper pace. As a result, the US dollar has come under pressure, weakening against other major currencies, as evidenced by the 4.8% decline in the US Dollar index.

Falling interest rates boosted the price of gold as the yellow metal rose 12.8% during the quarter, closing out the period at  $2,630/ozt.

From a regional perspective, the tech-heavy Nasdaq index (+2.8% ) underperformed during the quarter. The broader S&P 500 Index (+5.8%) delivered a higher return but the impact of a weaker US dollar was readily apparent when comparing the performance of the US against European equity markets.

In their respective local currencies, the returns of the Dutch AEX (-0.7%), the UK FTSE 100 (+2.4%), the French CAC (+3.7%) and German DAX (+5.5%)  were all below the US. However, in USD terms, the returns for the  European indices were notably higher, as the UK (+8.0%,) French (+6.5%) and German (+10.4%) indices outperformed their US counterpart.

Chinese authorities announced a slew of stimulus measures in an effort to reinvigorate their stumbling economy and debt-burdened property sector. Chinese equities reacted positively to the news leading to sharp gains across the board with the Hong Kong Hang Seng Index and the mainland CSI Index returning 14.8% and 17.7% respectively for the quarter.

The Energy sector was the worst performing sector during the quarter. The price of oil fell over 18% during the period as Brent crude and WTI closed out the quarter at $72 and $68 a barrel respectively. The decline, owing to increased output from the US and weak demand out of China, may be short-lived. Tensions in the Middle East continue to rise and the recent stimulus injected into the Chinese economy may serve as an additional catalyst.

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