July monthly investment update – Reflections on June 2024

Introduction

In this article, Wesleyan's Director of Investments, Martin Lawrence, discusses global elections, interest rate cuts and more.

The month of June turned out to be one of mixed blessings with some parts of the global stock market performing really well (such as US technology shares), whilst others (notably the French stock market) performed poorly.

Politics, we know, played a central role but, perhaps unusually for the British scene in recent years, it wasn't the imminent UK general election ‘causing ripples in the water’ this time around.

Global election fever

In a year where many global economies have either held or are holding general elections, it seems the US was attracting media attention for perhaps all the wrong reasons in its presidential campaign year.

In June, the highly publicised coverage of Donald Trump’s historic New York criminal trial set a new record as he became the ‘first’ US president to be convicted of a crime (for falsifying business records). Subsequently, Trump received partial immunity from prosecution by the US Supreme Court, which declared that former presidents can be shielded from criminal charges. 

Nevertheless, and somewhat counterintuitively to onlookers, Trump remains in pole position to become the next President of the United States (for a second term). This is thanks, in part, to what many saw as a ‘stumbling performance’ by President Joe Biden in the first presidential debate (with Mr Trump) during the month – possibly throwing his re-election campaign into doubt. 
 
We think US political risks are being underestimated by investment markets as a November 2024 election looms for the country. But could a bumper global elections’ year really affect world markets? Not at the moment it seems for US technology shares as they performed strongly in June - rising another 6%, on average, during the month alone.

In particular, Nvidia continued its meteoric rise with its share price now over 150% higher since the beginning of the year, pushing the valuation of the US chipmaker past $3 trillion - briefly overtaking the big household names of Microsoft and Apple. Whilst we do own Nvidia shares in some of our funds (including our With Profits Fund), we do not own enough of them relative to the size of the company, and this 'underweight' position has been a headwind for us in 2024, despite some good gains in other shares - including Microsoft itself.
 
Moving away from the US, political risks emerged in France in June, as President Macron - reacting to gains by the far-right in European elections - called a shock ‘early’ parliamentary election in the country (much like Mr Sunak in the UK) causing the French stock market - and connected shares - to fall sharply.

The French elections, which began at the end of June, look set to cause political gridlock once a government is eventually formed. Whilst not great news for the French Government’s ability to push through longer-term reforms, myopic markets (those with a short-term outlook) are being comforted (for now) in the knowledge that more unsettling change looks less likely.

Interest rate cuts get underway

June also saw interest rates cuts taking place in some countries across the globe. Financial markets in Europe saw the European Central Bank (ECB) cut rates in the month for the first time since 2019 (as had been widely anticipated) - with its deposit rate now at 3.75%. This was due to inflation looking more under control in recent months - including a provisional fall to 2.5% in the month of June.
 
The first G7 country to cut interest rates, however, was Canada - just pipping the ECB to the post in early June with a reduction of 25 basis points (its overnight rate is now at 4.75%). Switzerland also cut its policy rate in the month in an unexpected move down to 1.50% - hoping to get ahead of global peers. 

In China, its economic data continues to be very mixed, and the strength of its economy remains questionable. Common indicators such as the Purchasing Managers Index (PMI) suggest that the recent better readings in May had stalled again during June - which has a knock-on effect to companies which supply (or have other exposures to) China - including UK mining companies such as Rio Tinto, whose shares we do own in many of our funds.  
 
Back in the UK, it was pleasing to see inflation in May fall to the 2% target set for the Bank of England (by the Government). However, the much-anticipated changes to interest rates have not yet come to fruition as they were held steady at 5.25% in June – with investment markets still hopeful for a late summer cut. 

With all the noise of global elections and cuts to interest rates, UK political risk has been viewed, by financial markets, as ‘lower’ than in other countries (think France’s snap election, for example).

But why is this? It’s simply because opinion polls had been strongly suggesting that the Labour party was highly likely to form the next Government - and with a sizeable majority. We know only too well that providing certainty to markets is often more valuable than the actual result itself. And, more so, because we know that markets generally dislike the struggles and implications of trying to form coalition governments (something that a beleaguered France may soon have to deal with).

Our funds view and outlook

Assessing the economic effects of government policies should help steer markets from here, including any signs that manifesto promises (made by a newly formed UK government) are not being upheld.

But for countries like the UK, it should be remembered that the UK economy, and the UK stock market, are not one and the same - and many companies play on a bigger global stage. And, we are no exception, as we continue to further diversify our funds, and increase our exposure to global investments, as and when opportunities present themselves.