Several of the world’s stock markets climbed to new highs in the first half of 2024, and now seem to be taking a breather as we wait for more direction from central banks on when they will decide to reduce rates.
Whilst we have seen a decline in inflation since the start of 2024, there was a slight increase in the rate in July to 2.2% but September saw a drop to 1.7%. 2% is the target rate for the BOE, so would expect to see further rate reductions this year, which should assist in stimulating the economy.
From an investment point of view, one needs to bear in mind that a reduction in interest rates is good for investments because the cost of borrowing goes down, leaving more profits in the pockets of the shareholders. Bonds and Gilt prices also appreciate, as the interest earned on those instruments becomes a more attractive option to holding cash. Those holding cash may find it more difficult to achieve the same returns that they have had over the last 12 months.
The FTSE250 has continued its strong run of late, with the index now ahead by 7.5% so far this year. This is largely due to improving economic prospects and political stability following the recent predictable Labour victory at the polls. This makes investments into the UK quite attractive and have therefore increased our exposure to a cheaper UK market.
The US market, which saw formidable growth in the first half of this year, has slowed down recently due to caution around extreme valuations of the magnificent 7 Technology stocks which have, to a large extent, driven the rally in US equities. There is still good value to be had in the mid and small cap sector, we will therefore be increasing our allocation to this sector.
Asia-Pacific equities have declined, with Hong Kong leading the losses. The Hang Seng Mainland Properties index, which tracks Chinese real estate developers listed in Hong Kong, dropped 3.7 per cent. Chipmakers also began selling off after Donald Trump said Taiwan should pay for its own defence and the US was reported to be considering tougher restrictions on trading chips with China. Our Asian holdings have little exposure to China and have therefore performed well.
Europe has also struggled with inflation, and this now seems to be close to target which has been welcomed. Europe’s Central Bank has, however, paused any further interest rate cuts and has left rates at 3.75%. Political tensions will remain, but further rate cuts will be a tailwind for European investments.
In summary, our portfolios have recovered well from the lows last year and feel that we are well positioned to take advantage of any rebound going forward.
Cash and Investments in Beating Inflation. With interest rates being far higher than they have been in a long time, it can be very tempting to hold cash. Below is a graph which illustrates that if you invest, rather than holding cash, you stand a far better chance of beating inflation over all periods, and the longer the funds are invested the higher your chance of outperforming inflation.
