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% 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 there are clear ways to generate alpha at the moment in equity markets even if the overall direction is unclear.
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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The Funds managed by the Global Equities team:
May hold overseas investments that may carry a higher currency risk. They are valued by reference to their local currency which may move up or down when compared to the currency of a Fund. May encounter liquidity constraints from time to time. The spread between the price you buy and sell shares will reflect the less liquid nature of the underlying holdings. May have a concentrated portfolio, i.e. hold a limited number of investments or have significant sector or factor exposures. If one of these investments or sectors / factors fall in value this can have a greater impact on the Fund's value than if it held a larger number of investments across a more diversified portfolio. May invest in smaller companies and may invest a small proportion (less than 10%) of the Fund in unlisted securities. There may be liquidity constraints in these securities from time to time, i.e. in certain circumstances, the fund may not be able to sell a position for full value or at all in the short term. This may affect performance and could cause the fund to defer or suspend redemptions of its shares. May invest in emerging markets which carries a higher risk than investment in more developed countries. This may result in higher volatility and larger drops in the value of a fund over the short term. Certain countries have a higher risk of the imposition of financial and economic sanctions on them which may have a significant economic impact on any company operating, or based, in these countries and their ability to trade as normal. Any such sanctions may cause the value of the investments in the fund to fall significantly and may result in liquidity issues which could prevent the fund from meeting redemptions. May hold Bonds. Bonds are affected by changes in interest rates and their value and the income they generate can rise or fall as a result; The creditworthiness of a bond issuer may also affect that bond's value. Bonds that produce a higher level of income usually also carry greater risk as such bond issuers may have difficulty in paying their debts. The value of a bond would be significantly affected if the issuer either refused to pay or was unable to pay. Outside of normal conditions, may hold higher levels of cash which may be deposited with several credit counterparties (e.g. international banks). A credit risk arises should one or more of these counterparties be unable to return the deposited cash. May be exposed to Counterparty Risk: any derivative contract, including FX hedging, may be at risk if the counterparty fails. Do not guarantee a level of income. May, under certain circumstances, invest in derivatives, but it is not intended that their use will materially affect volatility. Derivatives are used to protect against currencies, credit and interest rate moves or for investment purposes. There is a risk that losses could be made on derivative positions or that the counterparties could fail to complete on transactions. The use of derivatives may create leverage or gearing resulting in potentially greater volatility or fluctuations in the net asset value of the Fund. A relatively small movement in the value of a derivative's underlying investment may have a larger impact, positive or negative, on the value of a fund than if the underlying investment was held instead. The use of derivative contracts may help us to control Fund volatility in both up and down markets by hedging against the general market. The use of derivative instruments that may result in higher cash levels. Cash may be deposited with several credit counterparties (e.g. international banks) or in short-dated bonds. A credit risk arises should one or more of these counterparties be unable to return the deposited cash.
The risks detailed above are reflective of the full range of Funds managed by the Global Equities team and not all of the risks listed are applicable to each individual Fund. For the risks associated with an individual Fund, please refer to its Key Investor Information Document (KIID)/PRIIP KID.
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