Quarterly Investment Update

Written by Damian Barry, CFA

Why have markets become more volatile in August?

Since the end of July, we have seen a confluence of economic, market and geopolitical developments occur at a time when many market participants are on vacation, which may well have exacerbated the market impact. Early in August, we saw US economic data disappoint the market because it showed unemployment rising faster than expected. While not overwhelmingly bad news in and of itself it caught the market by surprise as most of the employment data this year had been more encouraging. Market expectations are now leaning towards the US Federal Reserve lowering interest rates at its September meeting, as inflationary pressures have sufficiently abated and the risks to economic growth and employment rise by keeping interest rates higher for longer.

In stark contrast to the US, Japan raised interest rates recently to combat inflationary pressures. This increase caught markets by surprise particularly those involved in the “carry trade”. The carry trade is an investment strategy where sophisticated traders borrowed money at near-zero Japanese interest rates and invested those funds in higher-yielding assets. These traders profited as long as the Japanese yen didn’t increase in value and Japanese interest rates remained low. However, the unexpected increase in the Japanese interest rate boosted the yen. This forced carry trade investors to sell their investments to buy yen to repay their borrowings. This created a downward spiral, as a strengthening yen resulted in more investments being liquidated to buy more yen and so on. The Bank of Japan has taken effective steps to stabilise the market and allay concerns.

Lastly, Israel targeted and killed a senior Iranian military commander. Iran has vowed significant reprisals for this attack which has increased geopolitical tensions in the region.  Despite all this, US corporate profitability continues to reach record highs, helping equity markets to rebound significantly by mid-August. In August and September we have typically seen a seasonal increase in volatility, but we must differentiate between volatility and the risk of long term capital impairment. None of the recent events suggest the latter is the case. As Benjamin Graham said, “in the short run, the market is a voting machine but in the long run, it is a weighing machine!”

 

Q2 2024 Reflection

Within this unique update, Damian Barry, Chief Investment Officer of MASECO Private Wealth, provides a direct client update on Q2 2024, which was marked by strong economic growth, easing inflation, and a favourable environment for equity investments. Despite initial challenges, particularly for small-cap stocks, the quarter ended on a high note, with equities delivering positive returns across the board.

Damian delves into the significant impact of the “Magnificent 7” companies, driven by the AI revolution, which has dominated market returns and created an unusually concentrated market environment. He also discusses the effects of lower growth in China on the luxury sector, the resilience of emerging markets benefiting from a weaker dollar, and the importance of controlling inflation to pave the way for potential interest rate cuts.

Damian also discusses the potential impact of the recent labour election and upcoming elections in the US, from a tax planning perspective, as well as the potential impact on markets, and the importance of a diversified to minimise exposure risks.

Please note: This video update was recorded on 29th July as a quarterly reflection piece.

 

The Legal Stuff 

Use of information:

• Nothing in this document constitutes investment advice and should not be construed as such.
• This document is provided for information purposes only and is not intended to be relied upon as a forecast, research or investment advice.
• This does not constitute a recommendation, offer or solicitation to buy or sell any products or to adopt an investment strategy.

Risk Warnings:

• All investments involve risk and may lose value.  The value of your investment can go down depending upon market conditions and you may not get back the original amount invested.
• Your capital is always at risk.
• Currency exchange rates may cause the value of an investment and/or a portfolio to go up or down.
• Although the information is based on data which MASECO considers reliable, MASECO gives no assurance or guarantee that the information is accurate, current or complete and it should not be relied upon as such.
• Information about tax matters and potential tax benefits are based on our understanding of current tax law and practice and may be subject to change. The levels and bases of, and reliefs from, taxation is subject to change. The tax treatment depends on the individual circumstances of each client and may be subject to change in the future.

Performance:

• Past performance is not a reliable indicator of future results.