Q3 2024 Comment
The third quarter of 2024 was not a period for the faint hearted. Recent commentary from the likes of David Einhorn at Greenlight Capital suggesting that markets are broken looked prescient as markets whipsawed their way through the summer.
Volatility was everywhere but nowhere more so than for the Nikkei 225 in Japan. If you had been on holiday and done nothing more than check your quarterly valuation, you would wonder what all the fuss was about; the Nikkei ended the quarter up 7.7%. However, intra-quarter volatility was a different story. After a 6.5% rise to 11 July, the Nikkei then fell 25% to early August, including a 17% two-day fall as markets appeared to succumb to a 1987-like liquidity event.
Assets across the world reacted in tandem, with the US SOX semiconductor index in particular falling 25% from peak to trough, reflecting a general move towards derisking of the most crowded trades (in this case the big AI capacity buildout). Even the mega cap constellation saw profit taking and a quarter of underperformance, ending flat as a group against the S&P 500 index being up 5.5%.
At the same time, interest rate markets were reacting violently to the anticipation and the result of a surprise 50 basis points (bps) cut by the Federal Reserve on 18 September. The short end (two year) saw yields fall a whopping 115bps from 4.75% at the start of the quarter to 3.60% at the end. In the commodity space, gold rose 14% in the quarter – for a four-quarter winning run – and to new all-time highs, while oil fell 18%, perhaps taking its cue more from expected global economic weakness than the rising tensions in the Middle East.
All in all, the quarter was an ambiguous juxtaposition of asset price moves that left many wondering what the path to the end of the year would really look like. As the Kobeissi Letter bullet pointed with tongue in cheek, stocks are rising like we are avoiding recession, gold prices are rising like we are heading into recession, oil prices (late in the quarter) are rising like we are heading towards all-out war, bond prices are easing like geopolitical tensions are easing and tech stocks are rising like risk appetite is at all-time highs.
With such a lack of clarity, it normally pays to be more cautious but, as we set out in the outlook section, there are clear ways to generate alpha at the moment in equity markets even if the overall direction is unclear.
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Outlook
The Fed commentary surrounding the 50bps cut in September made clear that the economy is strong, yet the rate cut itself might suggest otherwise. So we must believe that the market is going to remain volatile around data points until the path of the economy is clear. CPI prints and jobs data in particular will remain scrutinised in detail. making it hard to predict outright direction into the end of the year.
However, we believe this backdrop is supportive of a broadening out in the market, which should translate into a fertile time for stock/sector/theme pickers. Looking at the winning equities ‘baskets’ in the third quarter (according to Goldman Sach’s designations), the US was led by housing, non-profitable tech, ‘power up America’ and infrastructure – all lower rate beneficiaries while their AI basket of names turned in a negative quarter. Technology has been sidelined at its broadest level as the next wave of AI opportunity is more carefully scrutinised.
Our base case remains the one which we set out in July: alpha will be generated from a focus on a broadening out of market leadership and less so from betting on the absolute direction of markets. It is time to think beyond the consensus trades of the last 12 months; this should be highly beneficial for stock picking strategies.
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Meet the team
The Global Equities team is headed by Mark Hawtin, who has 40 years of investment experience, including managing global equity long only and long/short funds. Mark joined Liontrust in 2024 to create the Global Equities team along with David Goodman, Kevin Kruczynski and Pieran Maru. The four managers run a range of long only and long/short equity funds. Ewan Thompson and Tom Smith joined Liontrust in 2019 and manage emerging markets equity funds and the Japan Equity Fund.
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