Our investment outlook for August 2024

This article was written by Thomas Becket and originally published by CGWM. 

The latest outlook from our experts on 2024’s key investment themes

What has caused the recent bout of market volatility?

Perceived wisdom always suggested that summer months were traditionally a quiet period for financial markets. Investors could relax easily and avoid looking at their investment portfolios. The experience that we have of investing for our clients for over 20 years provides clear evidence that the suggested ‘quiet period’ was incorrect, and this year is reinforcing the view that summer is often quite volatile across financial markets.

The most recent bout of volatility has been triggered by a combination of growing concerns over the outlook for US and global economic growth; worries that central banks are cutting interest rates too late, and that a souring economic environment could lead to lower corporate profits and a rise in insolvencies. While we are always alert to anything that could negatively impact our client portfolios, we are not sounding the alarm yet. Our views have not changed materially over the course of this year so far and we have aimed for both balance and diversification across our investment strategies in preparation of market challenges through another uncertain period.

Will election fever help or hinder investment opportunities?

At the start of 2024, the consensus view was that geopolitical events would provide challenges for investors this year. While we sympathised somewhat with this view, we mostly disagreed. Our expectation has been that although global events would add to the volatility experienced throughout the ‘turbulent twenties’, both global equity and fixed interest markets would make progress this year leading to a broadly positive experience for our client portfolios. We believed the recovery seen in portfolio values since late 2022 would continue, despite fluctuations occurring amid a changing political backdrop in the UK and a persistently complicated geopolitical environment elsewhere.

Why should investors ignore the geopolitical noise?

So far, our view has been sensible. Markets have made progress, even during one of the busiest years in history for political elections. The ongoing war in Ukraine and the obvious deterioration of relations between global powers and their allies have not prevented portfolios from making progress this year.  There is evidence that the most important lesson for investors currently is to ignore the ‘noise’ and focus on the quality of the assets you’re buying, the price you’re paying and be patient. A mantra we have followed throughout the years while managing our client portfolios and one we will continue to follow in the future.

Could political change create problems for investors?

Currently the most frequently asked question from our clients is ‘whether current political movements will develop throughout the next few months - and will this create a speed bump for investors?’ 

The answer is ‘possibly’ and the evolving political backdrop is undoubtedly adding to recent market drama.

Uncertainty over how the new Labour government will balance its spending plans with any rise in tax is front-and-centre in the minds of our clients - as well as those of our international creditors, who we rely on to keep financing our government’s spending. We believe that this will create nervousness in parts of the government bond market, particularly with longer-maturity bonds, but should not detract from a positive outlook for attractively valued UK equities or corporate bonds.

Obviously, if we were to see some extreme or unexpected policy announcements from the new government then it may lead us to shift our view - but we think this is unlikely in the short term.

Will investors be feeling ‘les bleus’ or ‘star spangled’?

Political chaos and the subsequent gridlock in France following the second round of its election have also contributed towards market volatility in the early summer months. The situation across the Channel is fluid, but we would expect an uneasy situation to remain there for some time, undermining overall confidence in the European Union. Will this matter for markets? Again, ‘possibly’ is the answer, but it’s likely to be localised in French markets and, potentially, in longer-maturity government bonds in Europe.

Greater focus will undoubtedly be drawn towards the US, as the presidential election in November draws closer. The financial markets had long seen this duel between two questionable candidates as a ‘coin toss’, leading to very little market impact until recently. The recent withdrawal of Joe Biden from the White House race, after a disastrous televised debate, and his subsequent endorsement of vice president Kamala Harris may tighten the election. The fluctuating fortunes of both presidential candidates in the polls is adding to recent market oscillations and will continue to do so heading into November’s election.

Our asset allocation framework: the five key investment themes

With all the shifting political and geopolitical sands, it is important that we are constantly evaluating our five key investment inputs, or ‘pillars’, that will affect our decisions in 2024.

In short, while the political events unfolding around us are contributing towards our balanced, diversified and ‘open-minded’ approach, they’re not driving our asset allocation decisions or structural investment biases.

Much more important to our portfolio construction are the ‘five key pillars’ or themes of our asset allocation framework. Our views are:

1. The global economy - will continue to grow at a solid, but unspectacular pace; a recession is possible, but it is unlikely to be imminent. We expected the recent slowdown in the US economy, but remain of the view that the outlook is broadly satisfactory - even if risks are rising
2. Inflation - pressures are continuing to subside, if not at the pace we would all like
3. Interest rates - subsiding inflationary pressures has led to a first rate cut in the UK and the US central bank will be following suit and cutting rates in September
4. Corporate earnings - interest rate cuts should support bond markets, where yields are sensible - and prevent major issues in equity markets, where valuations are broadly fair - we also expect growth in corporate profits, as shown in the ongoing corporate results season
5. Market valuations and investor positioning - a major factor in the latest bout of market nerves has been the fact that markets have performed well this year and investor sentiment has become too complacent in some places, such as US equities, but probably not sufficiently enough to lead to a major market drawdown in the coming months.

While we have confidence that the ‘base case’ we outlined at the start of the year remains likely, we will continue with our ‘cautiously optimistic’ stance throughout the second half of 2024. Politics can - and probably will - provide excitement, meaning that we should be watchful. But we will focus on the fundamentals. If we avoid a global recession, inflation ‘plays ball’, interest rates are lowered, and companies grow their profits, there are reasons to expect the positive progress seen in our client portfolios over the last two years to persist. Recent market turbulence is a clear indicator that the summers are never ‘quiet’, but are not a reason for us to completely shift our views and portfolio positioning.

Any questions?

If you have any questions about the current market and economic environment or your asset allocation within your portfolio, please get in touch with us.

For further information on any of the terms used in this article please see our glossary of investment terms.

Are investors right to be seduced by America’s AI giants?

Given recent investment returns in the US, particularly amongst the ‘magnificent seven’, why should we remain cautious about completely abandoning the UK or other markets?

Discover our accompanying article to Investment Outlook August 2024.

Read more

You may also be interested in:

• A seismic shift in UK politics - stability in asset markets
• Beyond 60/40: rethinking portfolio construction

Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. Past performance is not a reliable indicator of future performance.

The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity.

This is not a recommendation to invest or disinvest in any of the companies, themes or sectors mentioned. They are included for illustrative purposes only.

The information contained herein is based on materials and sources deemed to be reliable; however, Adam & Company makes no representation or warranty, either express or implied, to the accuracy, completeness or reliability of this information. Adam & Company is not liable for the content and accuracy of the opinions and information provided by external contributors. All stated opinions and estimates in this article are subject to change without notice and Adam & Company is under no obligation to update the information.