August monthly investment update – Reflections on July 2024

Introduction

In this article, Wesleyan’s Director of Investments, Martin Lawrence, discusses the elections, at home and abroad, and the effects on investment markets.

July was certainly eventful. In one of the busiest months of the year for travel, the world looked on helplessly as a faulty IT outage affected airlines, hospitals, and businesses globally; the UK voted in a Labour government; and disturbing events unfolded in the US in the race to the Whitehouse.

With his chances of retaining the Presidency slipping, it was perhaps inevitable that President Joe Biden would step aside during the month and leave the path clear for his Vice President, Kamala Harris to secure the Democratic Party nomination (yet to be officially confirmed). This makes the US election now look like a much closer race. Donald Trump was the strong favourite to win as support galvanised around him following the shocking attempted assassination on his life in mid-July. But, it seems, according to polls in the month, that Kamala Harris is now closing the gap.

Global events and the effect on markets

What happens in the lead up to the US elections does have an impact on global investment markets. Currently, it is mostly to do with 'protectionism', whereby a country uses restrictions, such as tariffs, to boost its own industry and keep foreign competition (both imports and exports) at bay. For the US, in particular, it is the US-China relationship that is causing most concern. Whilst President Biden has been ramping up the rhetoric by looking to restrict the supply of US-made tech components into China, the likelihood remains that a second Trump presidency would involve far more.

If we think back for a moment to 2019, during his presidency, Trump applied steep tariffs on billions of dollars’ worth of goods into the US from the EU, Canada, Mexico, and China. Back to 2024, and if Trump does win the Presidency later this year, and takes up a similar stance, this could potentially lead to more trade tariffs, higher prices, higher inflation, trade wars with global economies, and potentially higher interest rates for the US in the longer term.

In the short term, Trump and the Republicans are seen as more ‘pro-business’ (for American businesses at least) and would likely cut regulation and taxes - helping US companies in the early part of his presidency – part of Trump’s appeal to voters. Investment markets’ reactions will also be influenced by whichever party controls the law makers in the House of Representatives, and the Senate, as this could restrict the freedom of a President of either party.

More widely, geopolitical tensions started to rise (again) towards the end of July with more high-profile fatalities in the Israel-Gaza war with rocket attacks – devastating for those caught up in it. Such events sometimes have an effect on markets – on this occasion, it slightly pushed up the price of oil.

Other news in the month

The Bank of Canada cut interest rates in July, but there were no additional moves in the month by the European Central Bank (ECB), or the US Federal Reserve. Over at the Bank of England, there was no activity either in terms of rate cuts as the MPC (Monetary Policy Committee) didn’t meet during the month of July.

The election results in the UK, which saw Labour win hands down, created little movement in the UK investment markets in the month, as they had already factored in the widely predicted result. This brought a sense of calm, as far as political stability is concerned, as we await the first Budget announcement of this new government in October.

Despite there being a £22bn black hole in the nation’s finances, and UK debt running at close to 100% of GDP (Gross Domestic Product), there was positive news: The UK economy saw economic growth (GDP) rise in May (the latest figures) by a better-than-expected 0.4%.

Back in America, pockets of weakness in their economy may mean the Federal Reserve will not wait before cutting interest rates – making a September cut much more likely. Jerome Powell (Fed Chair) sounded much less concerned about inflation at the end of July. Clues for this mood change included economic surveys which had suggested some easing of pricing pressures in both manufacturing and service sectors. Furthermore, latest numbers showed US wage growth eased back to 3.9%. But the real showstopper in July was the US inflation reading for June - which fell to an annual rate of 3.0%.

Meanwhile, China's economy has been weak recently and they have reacted by making modest cuts to lending rates in July. Further disappointment came in the month from China's Third Plenum - a meeting of the country’s top leaders - which contained no major new policy initiatives likely to stimulate economic growth. The Chinese currency has also been weak this year. As US technology shares surged in recent months, weak Chinese economic growth has held back other parts of global stock markets in 2024.

Patience is a virtue when it comes to investing and has been needed by both equity and fixed income investors in recent years - notably those invested in lower risk funds. With inflation looking much more under control both globally, and at home, this provides a safer backdrop for interest rate cuts. And, of course, it could potentially mean better returns for bond investors, who have been left behind by equity investors so far in 2024.