The first half of 2024 has proven to be a favorable period for investors, as stock benchmarks in the UK, US, and continental Europe hit record highs. The fixed interest space has also offered relatively attractive yields compared to much of the past decade. The MSCI All Country World Index ended the first six months of the year up 12.7% (all returns in sterling unless otherwise stated).
June witnessed a reemergence of US leadership in equities. The MSCI North America Index posted a 4.1% return, lifting the MSCI All Country World Index to a 3.0% monthly return. Political uncertainty and a period of consolidation after strong performance in previous months led to slight declines for the MSCI UK (-1.04%) and MSCI Europe ex UK (-1.61%). Despite this, UK stocks had a strong second quarter, outperforming peers and ending the period up 7.8% year-to-date.
Economic data continues to paint a mixed picture, causing central bankers to hesitate in loosening monetary policy as widely assumed at the start of the year. Although inflation has returned to more acceptable year-on-year levels, rate setters remain concerned that the battle is not over and that a significant reduction in interest rates could trigger another surge in price pressures.
In the UK, headline inflation was at 2% in May, marking the first time in three years it did not exceed the Bank of England's (BoE) target level. However, the core measure, excluding food and energy, stood at 3.5%, and services inflation was higher at 5.7%. Advocates for rate cuts might point to the headline figure, a rise in the unemployment rate to 4.4% (the highest level since the end of 2021), and a dip in leading economic indicators in June. On the other hand, first-quarter GDP growth was the fastest since 2019, beating expectations and being revised higher to 0.7%.
Despite the fall in headline inflation being announced the day before the BoE's most recent policy decision, rate setters chose to maintain the base rate at its 16-year high of 5.25%. At the time of writing, the chances of a cut at the next scheduled rate-setting decision in August remain uncertain.
Gilts performed well in June, with a broad-based index returning 1.3%, aided by softer economic data. We remain modestly overweight in duration due to the expectation of easier central bank policy and are underweight in credit versus government bonds due to current tight spreads.
In the US, the Federal Reserve (Fed) remains in a holding pattern, waiting for either inflation to decline faster or the economy to weaken sufficiently to require support. Recent economic data hints at a softening of consumer strength, and the unemployment rate has ticked higher, but overall, the economy continues to fare well.
Recent events suggest that the era of zero interest rate policy is firmly behind us, ushering in a new environment of higher-for-longer interest rates. Expectations for significant cuts this year have not materialized, and the base case is now for one to two 25 basis point reductions. This shift is due to leading economies showing ongoing resilience and inflation, while controlled from runaway levels, not being sufficiently subdued.