Endowus Q2 2024 Market Update and H2 Outlook— Shifting economic landscape and challenges

‍The divergence between AIs and the non-AIs

The driving force behind the equity markets, the artificial intelligence trends have their influence carried over into the second quarter of 2024. Underneath the positive returns and new record highs of the S&P 500 index lies a split market between the beneficiaries of the AI trends and the rest. 

AI continued to be the powerhouse behind stock gains, a trend that has persisted since late 2022 through this past quarter. The key performance contributors to the index included AI giants Nvidia, Microsoft, Apple, Amazon.com, Meta Platforms, Alphabet, and Broadcom, a chip supplier for Apple and other big tech names. Moreover, concentrated returns became even more pronounced.

The S&P 500 Index experienced a major divergence in the second quarter. A total of 50 AI-related companies returned 14.7% collectively, in contrast to the 1.2% decline in the rest of the market. Notably, among the 50 names, chipmaker Nvidia briefly became the world’s most valuable listed company in June, on the back of improved earnings following substantial investments in AI. 

Interest rates: to cut or not to cut…

Initial expectations for multiple rate cuts were scaled back to just two by the end of 2024, due to persistent inflation and resilient economic growth. Inflation remained higher than anticipated, driven by a strong labour market and higher oil prices.

The CPI gauge grew at a moderate pace in June, compared to the previous year and declined on a monthly basis, providing encouraging news for Federal Reserve officials seeking further evidence that they have successfully controlled rapid inflation. Overall inflation stood at 3% in June on a year-over-year basis, down from 3.3% in May and below the 3.1% forecast by economists.

The subdued inflation data could be the evidence of the progress the Federal Reserve officials have been aiming to observe as they consider when to begin reducing interest rates, especially, in light of the rising unemployment rate for the past three months. The unemployment rate throughout the quarter has averaged 4%, which is 0.4 percentage points higher than the three-month average low of 3.6% observed over the past year. The unemployment rate in June also marks the first instance since 2021 that the rate has exceeded 4%. Market participants are now predicting a possible first rate in September of this year.

In the first half of the year, the European Central Bank (ECB) began cutting rates in response to weakening growth and consumer sentiment. The ECB's cuts are expected to continue as the Eurozone’s inflation was closer to target levels, but still quite a bit higher than the 2% target at 2.6% as of May 2024. The inflation rate is expected to trend down to 2.5% for June. As for the UK, inflation finally hit the Bank of England's 2% target in May but the Bank of England decided to stand pat on interest rates. Some of the cited reasons include a strong labour market and resilient wage growth.

Over to China, CPI inflation in June slightly decreased to 0.2% year-over-year, down from 0.3% in May, and fell short of the expected rise to 0.4%. Over the past four months, inflation has remained quite stable, ranging between 0.1% and 0.3% year-over-year. On a month-to-month basis, June's CPI inflation dropped to -0.2%, marking the second straight month of decline.

The presidential race

The November US elections have been front and centre not just for the US media outlets, but also for those in Asia as well. Investors are closely watching the political feud unfolding, too.

Questions arise regarding the stock market's reaction should the incumbent, President Biden, secure re-election, or if a shift occurs with a Republican administration taking office. Additionally, investors are curious about market performance under different Congressional controls—whether dominated by Republicans, Democrats, or a mixed composition.

Although election years often featured heightened volatility, historical data suggests that US stocks have more frequently concluded election years with gains, compared to non-election years.

‍Outlook: H2 2024

As we enter the third quarter of 2024, the outlook for the stock and bond markets remains uncertain. We have compiled insights and perspectives from our fund management partners regarding various equity and fixed income markets to provide a clearer understanding of current industry considerations.

• Sector performance: Sectors like technology, healthcare, and renewable energy may be poised for growth due to ongoing technological advancements and increased focus on sustainability. AI-driven growth, particularly in the US, will likely continue to support technology stocks, while healthcare could benefit from demographic trends and innovations in medical technology.

• Small and mid-cap stocks: These stocks offer attractive valuations and have the potential for higher returns as the market broadens beyond the dominant large-cap stocks. However, their performance will be closely tied to the overall economic conditions and the timing of rate cuts. Some fund managers, however, continue to favour the large-cap segment, which generally tends to be higher in quality.

• US equities: Despite the recent strong equity performance, the market remains relatively expensive at 20x forward P/E. Consensus earnings expectations for the year indicate 11% growth, but headwinds from a stronger US dollar and slowing nominal growth could lead to lower-than-expected growth. Profit margins have been resilient so far, but a significant slowdown in growth could pressure firms' pricing power.

• Global (ex-US) equities: Compared to the US, non-US equities are currently trading at a significant discount. On a sector-by-sector basis, high-quality companies listed overseas are still cheaper than their US counterparts. In Europe, improving economic sentiment and manufacturing activity should support earnings and performance. In Japan, ongoing corporate governance reforms are expected to lead to multiple expansions, presenting a rare re-rating opportunity for investors.

• Emerging market equities: China outperformed the rest due to lower starter valuations and sentiment. Better economic momentum in parts of the economy, combined with more fiscal policy easing, should continue to drive a tactical rebound for a while longer. However, for Chinese equities to break out of their multi-year range, there needs to be a significant recovery in domestic demand, which seems unlikely this year given limited demand-side stimulus and rising geopolitical tensions ahead of the US election.

• Fixed income: Yield curves are anticipated to steepen, providing opportunities in intermediate-duration bonds and high-quality sectors. As monetary policies become more relaxed and growth and inflation slow down, the yield curve will likely begin to steepen and gradually moving into longer-term bonds could be beneficial for investors.

The views are collected from fund manager partners in June 2024.

At Endowus, we have found that staying invested, even through difficult markets, in a globally diversified portfolio, yielded better investing outcomes historically.

Q2 2024 market update

In the second quarter of 2024, global financial markets presented a mixed but generally positive landscape, reflecting diverse economic conditions and investor sentiments across different regions and asset classes.

Global equity market 

The global equity markets started with a weak start in April, then finishing strongly with a positive May and June. In a reversal from previous quarters, emerging markets outperformed the US and other developed markets. India was one of the leaders returning more than 10% (in USD terms). China, too, registered a 7% increase in the second quarter. 

‍US equities: The S&P 500 index returned 4.3% in the second quarter. The strong returns were driven by the technology and communication sectors as excitement around AI, strong earnings, and positive outlook continued to boost companies in that space. On the other hand, sectors like materials and industrials did not perform as well.

Europe and UK equities: The eurozone had a disappointing quarter amidst the uncertainty from the announcement of parliamentary elections in France and fading hopes for steeper interest rate cuts, with the FTSE Europe ex UK returning a mere 0.3% (in USD terms). While the UK had a decent quarter with the FTSE All Share gaining 3.8% (in USD terms), Japan had a negative quarter on the back of the yen’s weakness against the greenback.

Asian equities: Chinese stocks saw strong gains this quarter as low valuations attracted investors who were previously concerned about high valuations in India and currency issues in Japan. Excitement about AI also boosted Taiwanese stocks, making Taiwan one of the best-performing markets in Asia for both the quarter and the year so far. Indian stocks also grew significantly, with investor confidence pushing benchmark indices to record highs, especially in media and banking sectors.

Factors: Growth style was once again in favour, but this time only in the US. Growth companies in the MSCI US index outperformed value companies. In the rest of the world, both emerging and developed markets, value maintained a slight edge over growth. In terms of size, developed market large cap stocks continued to beat the smaller cap stocks in DM. In the US, this was by a large margin of more than 7%. In contrast, small cap stocks in EM outperformed large caps by about 90 basis points.

Global fixed income market

US Treasuries saw a sharp sell-off initially, but yields peaked in late April and then trended lower, ending the quarter roughly where they started. Overall, US treasuries were the only major sovereign market to deliver positive returns in Q2 2024. 

In the eurozone, French bond yields rose sharply compared to German bonds after the announcement of snap French elections, indicating higher perceived risk for French debt. The benign macro environment supported the riskier segment of fixed income. 

Resilient corporate earnings in Q2 meant that both default rates and credit spreads were relatively contained. High yield bonds were the top performing fixed income sectors as they benefited from strong coupon payments and lower duration. Closer to home, Asian high yield continued its rally and its outperformance versus US and Europe high yield year to date, as sentiment improved following Chinese authorities’ moves to support the real estate sector.  

Elsewhere, emerging markets bonds delivered a solid quarter. Investment grade corporate bonds, and securitized bonds such as covered bonds and mortgage-backed securities, also saw modest gains. 

Commodities and gold

The commodities market (S&P GSCI) also posted slight positive returns. Industrial metals and precious metals were the best performers in the index, while agriculture was the weakest. Gold had a strong quarter, returning about 4.9%.

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For details on how key Endowus portfolios performed in the quarter, click here. Watch our webinar on Q2 performance and market insights at this link.

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