Endowus Q3 2024 Market Update and Outlook — A glimmer of hope

A glimmer of hope for China

In late Sep 2024, China’s government made headlines with a bold and unexpected stimulus package aimed at revitalising its slowing economy. 

This effort marked a significant shift in China’s policy approach, which had previously been characterised by more gradual, piecemeal interventions. The recent measures, announced on 24 Sep, targeted both monetary and fiscal fronts, surprising markets and triggering an optimistic response from investors. 

This comprehensive stimulus package included major initiatives to support the economy and stock market:

1. Monetary easing: Cuts were made to the medium-term lending facility, the reserve requirement ratio (RRR), and mortgage rates, injecting liquidity into the financial system. The RRR cut alone will help boost lending and business activity.

2. Property market support: The Chinese government reduced the minimum down payment for second homes to 15%, and slashed mortgage rates, aiming to stabilise the struggling property sector. 

3. Stock market liquidity: The central bank will facilitate corporate share buybacks by providing refinancing options for loans taken out by firms for this purpose. Additionally, it will also support securities firms, insurance companies, and other institutional investors by making it easier for them to access funds. These institutions will be able to borrow highly liquid, low-risk assets such as government bonds from the PBoC, using their less liquid, higher-risk assets like equities as collateral. 

Read more: Summary of the stimulus package

Market reaction

Chinese equities surged following the announcement. Chinese equity markets experienced their most significant rally since 2008. In the past one-month period through 18 October, the CSI 300 had rallied by about 22%.

The 20% increase in just five days was followed by losses. Chinese equities gave back about 7.5% as the rally lost some momentum as concerns over the size and implementation of the stimulus resurfaced.  

Opportunities and risks ahead

China’s new policy direction opens up potential growth areas, particularly in sectors aligned with the country’s strategic priorities. 

Key industries, including electric vehicles, semiconductors, AI and healthcare, are likely to benefit from increased government support and investment.

However, as the recent correction in the Chinese stock market has shown, additional policy measures may be needed to sustain the recovery and momentum and provide reassurance to investors. 

China’s past stimulus measures have sometimes fallen short of expectations due to weak follow-through or insufficient scale. While the recent moves are promising, much will depend on how effectively these measures are executed in the months ahead.

The Fed starts cutting…

At the September FOMC meeting, the Federal Reserve announced a half-percentage-point reduction in its target interest rate, pointing to continued progress in controlling inflation and signs of a recent slowdown in the labour market. 

This decision put an end to months of investor speculation about the future direction of interest rates and marked the conclusion of an aggressive policy-tightening cycle that started in 2022 when inflation surged to 40-year highs.

Investors were expecting about 2 more rate cuts this year but since the September job report was released, indicating a still somewhat robust job market, expectations have tapered.

…and the US yield curve disinverts

The yield curve has started to disinvert after remaining inverted for much of 2023 and 2024. 

When the yield curve inverts, it means that short-term interest rates, such as those on 2-year treasuries are higher than long-term interest rates, like those on 10-year treasuries. 

Under normal conditions, longer-term bonds typically have higher yields than short-term bonds because investors demand more return for the uncertainty and risk that comes with lending money for longer periods. An inverted yield curve, therefore, signals that investors are expecting lower growth, lower inflation, or even a recession in the future.

The reasons behind a normalising curve are many. It could be that investors turned more optimistic about future economic growth. Now as the Fed has started cutting interest rates, lower interest rates also mean a lower borrowing cost in the short term, which typically supports the expansion of business activities. 

Q3 2024 market update

In the third quarter of 2024, global markets showed resilience, with most asset classes posting strong returns despite several bouts of volatility.

Global equity market 

The US stock market ended the third quarter on a positive note, with the Morningstar US Market Index gaining 6.06%. This recovery followed a selloff in August, driven by investors rotating away from the once-dominant mega-cap tech stocks. 

Nvidia, which had been one of the leaders in the artificial intelligence rally, fell 1.69%, while Microsoft and Alphabet saw steeper declines of 3.56% and 8.84%, respectively. Concerns about stretched valuations and the sustainability of tech’s leadership weighed on these stocks, despite continued bullishness on AI in the long term.

In developed markets, the US was a drag as it underperformed the rest of the developed markets. Japan equity, in particular small caps, had a good quarter. 

Diving deeper into developed markets, in terms of style, value stocks outperformed growth stocks by a substantial margin. Small caps also finally had their day in the sun, as they outpaced their larger cap peers. This marked a broadening of the stock market rally, with small-cap and mid-cap stocks also experiencing strong gains. Small caps, which had lagged earlier in the year, finally caught up as the prospect of lower interest rates created a more favourable environment for this segment of the market.

China was one of the strongest performers in the third quarter, as the Chinese equity market rallied hard in late September on the back of China’s stimulus announcement. 

Emerging markets, led by China, also outperformed developed markets in Q3. Unlike the developed markets, larger-cap EM stocks beat the smaller-cap segment. 

Global fixed income market

The fixed income market was another key beneficiary of the changing outlook for US interest rates in the third quarter of 2024. As the Federal Reserve cut rates for the first time since 2020, bringing the target range down to 4.75%-5.00%, bond yields fell across the curve. This shift drove strong price appreciation in bonds. 

The Bloomberg Global Aggregate Index (USD, hedged) gained 4.2% during the quarter and was up 10.6% over the past year. Long-term bonds, in particular, enjoyed the most robust returns as investors locked in higher yields amid expectations of a sustained easing cycle. 

The bond market rally also led to the disinversion of the yield curve, which had been inverted for over two years. EM debt was also one of the best-performing fixed income asset classes in the third quarter.

Commodities

The commodity market saw mixed performance during the quarter. The sharp decline in oil prices was one of the standout stories, with crude oil falling more than 11% due to weaker global demand and concerns about economic growth. This significant drop helped to alleviate inflationary pressures, as energy costs had been a major contributor to price increases over the past few years. However, the fall in oil prices weighed heavily on energy stocks, which posted losses for the quarter.

In contrast, gold performed strongly, rising more than 12% during the quarter. Gold’s appeal as a safe haven grew as investors sought protection from potential volatility and benefited from falling bond yields, which reduced the opportunity cost of holding non-yielding assets like gold.

Building a long-term resilient portfolio with Endowus Hong Kong

It is almost impossible to predict exactly how macro events would play out. However, spreading your investments across asset classes and geographies will help with diversifying your risk. With market volatility comes opportunities. If you have a long-term investing horizon, as many of us do, these developments may offer an opportunity through steady, regular investing in diversified and risk-adjusted portfolios.

With digital wealth platform Endowus, you can plan and manage your money — by investing in Best-In-Class Funds and globally diversified, low-cost model portfolios seamlessly.

Click here to get started on your investing journey with Endowus Hong Kong today.

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Risk Warnings

Investment involves risk. Past performance is not an indicator nor a guarantee of future performance. The value of investments and the income from them can go down as well as up, and you may not get the full amount you invested. 

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