June 2024 Monthly Market Review

Concentration was the biggest capital market theme in June. Global stocks returned a very healthy 3% in sterling terms, but this aggregate figure hides a substantial amount of dispersion. Returns were negative in the UK, Europe and China, but this was counteracted by the strength of the dominant US technology sector – which jumped another 6.8% through the month – as well as the strength of emerging markets (EMs) outside of China. The table below shows June’s sterling returns for major regions and asset class.

 

The outperformance of EM equities is particularly striking. EM stocks gained 4.7% in sterling terms last month, despite the fact that China – the index’s biggest component – finished 1.6% down. That EM stocks still had a strong start to the summer (I.e. up 6.8% without China) seems to be largely down to India and South Africa. Both enjoyed rebounds from tough periods, following surprising election results that weakened the incumbent governments.

Indian stocks in particular had a stellar month, as investors shook off concerns around President Modi’s failure to retain an absolute majority for his BJP party at the start of June. South African president Ramaphosa had to form a national unity coalition government mid-month, after the ANC party lost its majority for the first time since the fall of apartheid. These shocks prompted a sell-off in EM assets, but we wrote at the time that this kind of political volatility is often overdone and can make for a good buying opportunity once the dust settles. So it proved.

The other interesting part of the EM rally is that it shows a continued dispersion between China – for so long the driving force of EM returns – and the rest. After the US-China decoupling in recent years, what is bad for China can often be pretty good for other EMs (as Mexico can attest) and vice versa. Through June, there was increased pressure on China’s currency to fall, thanks to a long period of weakness in the Japanese yen (one of China’s biggest trading partners). This did little to disturb wider EM returns.

A political sell-off was also seen in Europe, where French president Macron’s surprise election call scared investors. European stocks lost 1.7% in sterling terms, while European bonds and the euro weakened in the build up to the first round of French voting on June 30th. The far-right National Rally party won 33% of the popular vote last weekend, but we will not find out how this translates to parliamentary seats until the second round on Sunday. Many left and centre candidates that came third, have pulled out of constituency races to consolidate the vote against RN. French and European assets actually rallied during the first days of July, as markets seemed to predict RN would fail to win an outright majority.

UK stocks also finished June worse off, dropping 1.1%, but that move does not look political. The makeup of Britain’s stock market makes it particularly sensitive to global demand for commodities and, although oil prices gained through the month, other commodities (like copper) stagnated. Meanwhile, markets seem nonchalant about the prospect of a Labour government, as shown by sterling’s gain against the euro in the first half of June.

On the other end, US stocks were once again out in front, with the S&P 500 returning a remarkable 4.3% in sterling terms. Interestingly, this came with some surprisingly soft economic data releases. It started strongly, with a shockingly large gain in May’s jobs data, but subsequent releases pointed to slowing growth. Since the Federal Reserve suggested it is still weighing up whether an interest rate cut is needed in its June meeting, markets took softer US data as a case of ‘bad news is good news’. Implied expectations of a rate cut in September are now firmer.

Rate cut expectations pushed bond yields gradually lower through June, but we saw a big reversal into the end of the month. The reasons for this are not fully clear, but it could be due to the struggles of Japanese banks with foreign bond holdings. Just this week, ratings agency Moody’s said it was considering downgrading Japan’s Norinchukin Bank due to foreign bond losses that “would materially hurt its profitability”.

Once again, US outperformance was really the outperformance of just a handful of its mega-cap tech stocks. The tech-heavy Nasdaq outperformed the S&P, and Nvidia shares alone jumped more than 12% through June. As we end the first half of 2024, this dominance and concentration of returns stands out as the biggest theme. Nvidia’s meteoric rise accounts for 35% of year-to-date returns for the entire S&P 500.

As we have written before, it would be wrong to call this a bubble – since Nvidia’s profits, both recent and projected, arguably back up its mighty valuation. But it shows how skewed economic and financial returns are, not only across the globe but within the US itself. Monitoring and managing the concentration risk this brings will be the key challenge for investors in the second half of the year.

 

Please note: The value of pensions and investments can fall as well as rise, and you could get back less than you invested.

Important Information

The text is taken from The Tatton Weekly and is provided by Tatton Investment Management. The information in this document does not constitute investment advice or a recommendation for any product and investment decisions should not be made on the basis of it.

Tatton is a trading style of Tatton Investment Management Limited, which is authorised and regulated by the Financial Conduct Authority. Financial Services Register number 733471. Tatton Investment Management Limited is registered in England and Wales No. 08219008. Registered address: Paradigm House, Brooke Court, Wilmslow, Cheshire, SK9 3ND.

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