• July 8th, 2024
• By Midsilver Investment Limited

In the second quarter, U.S. equities experienced gains, primarily driven by strong performances in the information technology and communication services sectors. Enthusiasm around artificial intelligence (AI) continued to propel companies associated with the technology, buoyed by robust earnings reports and optimistic forecasts. On the other hand, sectors such as materials and industrials lagged behind.

Within the financial sector, several U.S. banks announced plans to increase dividends following successful stress tests conducted by the Federal Reserve. The prospect of future interest rate cuts remained a focal point for the market. Early in the quarter, concerns arose about the U.S. economy potentially overheating, leading to negative market reactions to strong economic data. However, as the quarter progressed, optimism grew around the possibility of a soft landing for the economy. The Federal Reserve's latest "dot plot," reflecting policymakers' rate-setting forecasts, suggested only one rate cut for the year.

U.S. inflation, as measured by the personal consumption expenditures (PCE) index, showed a slight decline, easing to 2.6% in May from 2.7% in April. The labor market remained robust, with 272,000 jobs added in May, according to the Bureau of Labor Statistics.

In contrast, Eurozone shares declined in the second quarter. Market uncertainty was fueled by the announcement of parliamentary elections in France and diminishing expectations for significant interest rate cuts. The information technology sector in the Eurozone performed well, especially semiconductor stocks, while the consumer discretionary sector struggled, particularly in the automotive and luxury goods industries.

The European Central Bank (ECB) reduced interest rates by 25 basis points in early June, but the potential for further cuts was limited by persistent inflation. Annual inflation in the euro area increased slightly to 2.6% in May, up from 2.4% in April. Forward-looking data indicated a slowdown in the Eurozone's economic recovery, with the flash HCOB composite purchasing managers' index (PMI) falling to 50.8 in June from 52.2 in May, signaling weaker growth.

Political developments also played a significant role, with European parliamentary elections seeing gains for right-wing nationalist parties, particularly in France. President Macron's response, calling for parliamentary elections, surprised markets and led to French equities underperforming the broader Eurozone index.

UK equities saw positive performance, with the FTSE 100 reaching new all-time highs. Small and mid-sized companies (SMIDs) also benefited from a surge in new bids and growing optimism for a turnaround in domestically focused firms after years of underperformance. However, SMIDs lost some of their gains towards the end of the quarter as expectations for imminent interest rate cuts were tempered.

The UK economy, having experienced a mild recession in the latter half of 2023, rebounded strongly in the first quarter of 2024, with GDP growth of 0.7%. However, recent data indicated stagnation in April, with the unemployment rate rising to 4.4% as 140,000 jobs were lost. Meanwhile, annual inflation, as measured by the consumer prices index, fell to 2.0% in May, aligning with the Bank of England's (BoE) target for the first time since July 2021. Despite slowing growth and favorable inflation trends, the BoE maintained base interest rates at 5.25%, amid concerns that the drop in inflation could be temporary, driven by high wage inflation in the services sector.

The Japanese equity market posted a 1.7% gain in yen terms during the quarter, though the continued depreciation of the yen led to a negative return for foreign investors. The yen's weakness was largely due to the strong U.S. dollar, supported by expectations of prolonged high U.S. interest rates. The Bank of Japan (BOJ) took measures to address this, including a moderate rise in Japanese government bond (JGB) yields, which supported financial stocks. However, these actions were insufficient to reverse the yen's downward trend by the end of the quarter.

Both the Japanese government and the BOJ expressed concerns about the impact of yen weakness on inflation, with real-term wage growth remaining negative. Despite this, record-high inbound tourism contributed to increased spending, supporting consumer demand. The second quarter earnings season ended with better-than-expected results, highlighting Japanese companies' strengths in sales growth, pricing power, and cost control. However, conservative earnings guidance for the new fiscal year weighed on market sentiment.

In Asia, excluding Japan, equities recorded solid gains in the second quarter. Taiwan, India, and Singapore led the MSCI AC Asia ex Japan Index, while Indonesia, the Philippines, and Thailand were among the weaker performers. Mainland China also saw strong gains as low valuations attracted investors back to the market, particularly in light of concerns over high valuations in India and currency weakness in Japan. Taiwan emerged as the best-performing market in the quarter, driven by continued investor enthusiasm for AI-related stocks.

Indian shares also achieved significant growth, with benchmark indices reaching record highs, fueled by gains in the media and banking sectors. In contrast, share prices in Hong Kong remained relatively flat, while South Korean stocks experienced a modest decline due to growing caution over the global economy and the timing of U.S. interest rate cuts.

Emerging market (EM) equities outperformed their developed market counterparts in the second quarter. Softer U.S. macroeconomic data eased concerns about the timing of interest rate cuts, while a rebound in China further supported EM returns. Turkey was the top performer, buoyed by optimism that economic policies would remain orthodox. Taiwan also posted a double-digit return in U.S. dollar terms, driven by investor interest in technology stocks, particularly those related to AI.

South Africa was another strong performer, with investors welcoming the results of the country's general elections, which led to the formation of a coalition government. In India, political developments also supported equity market returns, as Prime Minister Modi's Bharatiya Janata Party-led alliance retained its parliamentary majority, despite losing its single-party majority.

Emerging European markets, including Hungary, the Czech Republic, and Poland, also performed well. Meanwhile, China's recovery in April and May, following a period of underperformance, contributed to its outperformance in the broader EM index, bolstered by optimism surrounding government support for the housing sector and President Xi's reform agenda.