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Offshore Commentary
October 2024 Market Performance
October was a challenging month for global markets, with most equity and fixed income markets experiencing declines. Heightened uncertainty around the upcoming US presidential election, potential interest rate changes, and mixed economic data contributed to increased volatility and risk-off sentiment. Japan emerged as a notable outperformer in equity markets, while energy and precious metals were the best-performing components within commodities.
Equities:
US equities ended the month lower, with growth concerns and election uncertainty weighing on sentiment. Disappointing earnings from some large corporations added pressure, and sectors like healthcare, materials, and real estate experienced steep declines. Financials, however, stood out as a positive performer, driven by strong earnings in the banking sector. Despite lower overall market performance, US GDP growth in Q3 came in at an annualized 2.8%, reflecting resilience, though slightly down from Q2’s 3.0% growth. Meanwhile, non-farm payrolls rose significantly, with 254,000 jobs added, supporting investor expectations of a 25 basis point Federal Reserve (Fed) rate cut in November.
In the Eurozone, equity markets also saw declines, with information technology, consumer staples, and real estate underperforming, while industrials and communication services held up slightly betier. The European Central Bank (ECB) delivered a 25 basis point rate cut amid mixed signals from the economy: Q3 GDP growth accelerated to 0.4% quarter-on-quarter, while inflation edged up to 2.0%. The composite purchasing managers’ index (PMI) remained below 50, indicating contraction in business activity.
UK equities also fell, particularly impacting small and mid-cap stocks exposed to the global macroeconomic outlook. A late-month sell-off in UK assets followed concerns over the government’s budget announcement, which raised spending but heightened fears of long-term inflation and rate hikes. Sterling weakened against the US dollar as markets adjusted to expectations for a slower pace of future rate cuts.
In Japan, equities proved resilient, with the TOPIX Index up 1.9% and the Nikkei 225 rising 3.1%. The market was driven by large-cap exporters benefiting from yen weakness and anticipation of expansionary policies after a snap election called by newly elected Prime Minister Ishiba. While the political situation remains volatile, Japan’s macroeconomic conditions appear stable, with solid corporate earnings and positive wage momentum.
Asia ex-Japan equities faced significant headwinds, with India, Malaysia, and South Korea leading the declines in the MSCI AC Asia ex Japan Index. Concerns over the Middle East conflict’s potential impact on oil supply weighed on Indian stocks, while disappointing stimulus out comes in China failed to bolster investor sentiment. Taiwan was the sole market in the region to end positively, buoyed by gains in semiconductor and construction stocks.
Emerging Markets:
Emerging market (EM) equities declined as risk-off sentiment intensified ahead of the US presidential election. A stronger US dollar and higher bond yields were key headwinds. Turkey, Greece, and Poland underperformed, impacted by geopolitical risks and concerns over potential changes in US foreign policy. In Asia, India’s market correction reflected weaker corporate earnings and slower growth. China continued to struggle with weak investor sentiment, despite government stimulus measures, while Taiwan’s technology sector kept it in positive territory.
Fixed Income:
Fixed income markets saw declines as bond yields rose. US Treasuries sold off amid anticipation of a Republican win in the upcoming election, which could lead to inflationary policies. The strong labor market and higher-than-expected inflation figures drove yields up, tempering expectations of further aggressive Fed cuts. The US 10-year Treasury yield moved above 4.0%, resulting in a -2.4% monthly return for Treasuries.
In the UK, the Labour government’s budget announcement, which included a £40 billion tax hike, led to a sharp sell-off in 10-year Gilts. Sterling also weakened against the dollar as the market factored in the impact of prolonged high interest rates to counter persistent inflation.
European sovereign bonds experienced similar challenges as inflation edged higher, bolstering expectations for caution from the ECB. On the credit side, high-yield bonds in Europe outperformed investment-grade credit, with Euro HY showing relative strength due to the expected benefits from ECB rate cuts.
Commodities and Digital Assets:
Commodities delivered mixed performance in October. The S&P GSCI Index saw modest gains, with energy, precious metals, and livestock among the strongest sectors. Within energy, crude oil prices rose slightly due to geopolitical tensions, though natural gas prices declined sharply. Precious metals like gold and silver advanced, supported by the weaker dollar and risk-averse sentiment, while agriculture commodities mostly fell, with sugar being the exception.
In digital assets, Bitcoin rose by 11%, reaching a new all-time high, while Solana gained 10%. Ethereum, however, declined by 3%. Overall, the crypto market capitalization rose by approximately 6%, driven by favorable macroeconomic factors, including lower US interest rates and positive sentiment regarding potential regulatory clarity after the US election. Inflows into US spot ETFs reflected strong institutional demand, with a Trump win seen as potentially favorable for regulatory developments in the digital asset space.
Conclusion:
With Donald Trump’s re-election on November 4, 2024, markets are responding to the potential implications of his policies, which prioritize economic growth through tax cuts, deregulation, and robust domestic industry support. In the near term, investors may experience a surge in sectors expected to benefit from his administration’s policies, particularly in financials, industrials, and energy. However, the increased likelihood of a more isolationist trade stance and elevated geopolitical risks introduces an added layer of uncertainty.
Central banks, particularly the Federal Reserve, may adopt a more cautious approach to further rate cuts in response to the potential for inflationary pressures from tax cuts and deregulation. This could lead to higher bond yields, particularly on the long end, impacting fixed income performance. The U.S. dollar has also strengthened on anticipation of economic expansion, which may add headwinds for emerging markets that are sensitive to U.S. policy shifts and dollar strength.
For investors, a diversified and quality-focused portfolio remains prudent as the new administration’s policies unfold. While market sentiment is currently optimistic, especially in risk assets, caution is warranted given the evolving regulatory and trade landscape. Balanced allocations across equities, fixed income, and alternatives may provide resilience against any policy-driven volatility and sustained macroeconomic shifts.
