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7 Minutes on Markets - Q2 2024 Market Update

Ahmer Tirmizi, Head of Fixed Income Strategy, Sam Hannon, Investment Associate29 May 2024

To quote a Greek philosopher, Pericles, who was an Athenian general, ‘it’s really difficult to predict what is going to happen, but it’s very easy to prepare’.*

And that rings true in our latest episode of 7 Minutes on Markets, where Head of Fixed Income Strategy, Ahmer and Investment Associate, Sam discuss how we are preparing our portfolios with two major themes at the forefront – interest rates and market rotation as we look ahead.



Moderator: Welcome to a new episode of Seven Minutes on Markets. I have been joined by Ahmer Tirmizi, Head of Fixed Income Strategy.

Ahmer Tirmizi: Hello.

Moderator: And Sam Hannon, Investment Associate.

Sam Hannon: Hello.

Moderator. Welcome both. So let's just jump straight in. So Ahmer, in the first quarter of 2024, there was optimism across the financial markets, where we saw some equity growth, albeit still a little bit concentrated on some names. But in April, the narrative was not so straightforward. So anyway, can you give us a picture of what's happened here and why?

Ahmer: Yeah, I think there's a habit to segment markets into neat calendar years, but we know that the world doesn't work like that, and markets certainly don't. And even though, as you mentioned, there were weaker equities in April, the year-to-date story that we've seen up until now was essentially a continuation of 2023; you know, equities were up fairly strongly and bonds were volatile. Now why did this happen? Well, on the equity side, growth has been more robust than expected and in the US particularly, there's lots of lingering Covid stimulus that have supported the consumer, and has helped them offset essentially some of the rate rises that we've seen… while on the bond side, central banks have signalled less rate cuts in 2024 than they did at the beginning of the year, probably linked to those lingering stimulus in the US as well. So for example, let's just take the Bank of England as an example. The market expected the Bank of England to cut interest rates by seven times in 2024, but as of today as we record this, that is down to two times – and that's had a notable impact on bonds. So you've had – you’ve had equity supported by stronger growth; that stronger growth is probably led to less rate cut expectations, which has led to volatile bonds, and that explains a large part of what's happened this year.

Moderator: Thank you very much, Ahmer. So you mentioned central bank policy having to adjust their stimulus plans to pretty much cope with the ever-changing environment. And they’re still obviously aiming for a soft landing in 2% inflation targets across various economies. But there's no guarantee of a soft landing, right? So what can you expect from the markets and how hard is it to know what to expect, Sam?

Sam: Well, it would be a miss at 7IM not to quote an ancient Greek philosopher in there market updates. However, Pericles, who was an Athenian general, said it's really difficult to predict what's going to happen, but it's very easy to prepare. But we always need to have a understanding or an outlook of what's going to happen in markets and the economy. So, really, as a summary point, the global economy will slow down. And what we'll see is moments and periods of volatility which client will find tricky, but also opportunity for where you can find pockets and value within. Why is this? Well, inflation is coming down. We're starting to see across the developed world that inflation has peaked in most areas and it's mostly falling. Obviously there's some stickier-than-expected inflation in the US, which is delaying things, but in general, inflation is coming down. And hopefully over time, this will then prompt some interest rate cuts, which remain high, and we do believe that we are at the peak of that hiking cycle. But the kind of the overall point is the economy is slowing. Consumers and companies are finding day-to-day life tricky and things again harder, and that impacted those higher-for-longer interest rates that’s starting to flow into the economy. So that's kind of what we see the next six to 12 months looking like.

Moderator: Thank you very much, Sam. So you mentioned slowing economy, you mentioned life being a little bit harder… then how do how does 7IM position itself to cope with such uncertainty, and are we prepared to cope in different economic environments?

Ahmer: There's a lot going on there and as Sam says, one of the things that we need to do is to prepare, and the way that we prepare is to position accordingly.
Now, there are two major themes that we think are going to happen in markets, to sort of lead on from what Sam said. Interest rates and where they go, and market rotation – let's take them in turn. When it comes to interest rates, we look at bonds and we think that bonds right now look like good value. They've historically been a really good protector for portfolios and a smoother of equity market returns, particularly when they're volatile. Now, this hasn't been the case over the last few years, but we do think that they will smooth those returns, more so in the future. And with bond yield at… with bond yields significantly above inflation at the moment, the first time that they're being like this for the for, let's say, a decade or so, we do think that bonds play a really, really crucial role in portfolios over the next six to 12 months. And within the equity space, as I mentioned, we positioned for rotation; and that is rotation away from large equities which have dominated returns in the last year or so, and towards smaller companies, those smaller companies that are true engines to the global economy. Now we directly position this through equally-weighted stocks, particularly in the US, so now there's rather than investing our capital according to the size of the company, we actually just invest in all the companies within the US space, but on an equally weighted basis; and that should position ourselves for that market rotation we talked about. But there are other positions that we have really high conviction in over the next six to 12 months. There are companies like the metals and mining sector, where these companies are at the centre of the climate transition. They are essentially mining what we call transition metals, the ones that are crucial for the solar panels and the wind turbines and so on and so forth, that are going to be really strong beneficiaries over the coming years… alongside healthcare companies, which, they have this very strong demographic tailwind. But, you know, these companies, which hasn't gone away, but these companies have underperformed over the last year or so, and we think that that's another place that we have a lot of conviction that the market is going to rotate back into some of those companies. So put together the two major themes – interest rates, market rotation – and we think our portfolios are really, really well positioned for both of those.

Moderator: Thank you, Ahmer and Sam, it was great to see your thoughts. That's all from us here at 7IM. Thank you for listening.

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