DPMS Portfolio Commentary

With a generally positive Q2 now firmly in the rear-view mirror, we are focusing on looking forward to a more accommodating picture for monetary policy for the remainder of 2024. Interest rate cuts are expected across developed markets as inflation starts to ease with growth prospects expected to improve as debt costs fall.

Executive Summary

  • August has seen some significant market volatility in the global markets, linked to concerns around a slowing US economy and increasing unemployment, however, we feel the sell off in the mega-cap tech shares was only a matter of time and the recent selloff has been overdone in more reasonably-valued sectors.
  • Due to minor concerns over the outlook for the European economy from political instability and stickier-than-expected inflation, we have slightly reduced allocation towards Meridian Euro Credit, our European bond fund.
  • We have increased conviction towards UK and US mid and small-caps with prospect of rate cuts on the near horizon. Therefore, we have reflected this with a slightly increased allocation towards JOHCM UK Dynamic, Chelverton UK Equity Growth and a newly introduced fund, Dimensional US Smaller Companies.
  • To allow for this increase, we have repositioned a small portion of our Global ESG, Infrastructure and European equity towards sectors where we see better investment opportunities.
  • We retain a medium and long-duration focus on our fixed interest investments to benefit from expected base rate reductions in the next 12 months.

August Market Sell-Off

We would be remiss not to mention the recent market events seen in early August, capitulated with a global market sell-off led by the US and Japan.

  • The Nikkei 225, Japan’s biggest stock market index, fell over 12% last Friday due to concerns over the continuation of the Bank of Japan’s rate-hiking despite poor economic growth figures. This was the worst single day in the Japanese stock market since the Black Monday crash in 1987. However, increasing rates by 0.25%, prompted a significant surge in the value of the Yen. Leveraged investors have borrowed in Yen for years to invest in other assets, notably US Tech shares, so when some of the Tech results disappointed and the cost of borrowing in Yen increased, this was a cue for forced selling of Yen, Japan and tech shares.
  • Japan’s troubles came at the same time as rising recessionary concerns for the US, with worries that The Federal Reserve (The Fed) were too late to begin their rate cutting cycle. An unexpectedly weak jobs report showing the labour market cooling with rising unemployment helped to drive the sell-off, particularly in the high-valuation Tech part of the US market.
  • Fundamentally, we have not seen much of a change to our macro-economic outlook despite a handful of weaker-than-expected data points. Earnings reports remain solid in Q2 and although we have seen a price bubble develop in Tech, the higher valuations have been supported in many companies by increasing earnings.
  • This sort of turbulence is very normal despite a higher level of panic-selling, although we feel this may have been overdone. As seen recently, we expect this to be a short blip in prices as investors return to fundamentals after overreacting and over-selling. To illustrate this, after the 12% drop on Friday 2nd August, the Nikkei 225 bounced back 9.2%. Periods of rotation such as this typically present attractive buying opportunities and should not be a cause for panic.

Macro-Economic Summary

  • The European Central Bank (ECB) has led the way with the first major Central Bank rate cut (from 4% to 3.75%) since the onset of the COVID pandemic in 2020. This paved the way for The Bank of England (BoE) to cut from 5.25% to 5% in early August. The Fed is expected to start its rate cutting cycle in Q3 2024, which will be largely supportive for global bond markets.

Source: Bloomberg, J.P. Morgan Asset Management. Expectations are calculated using OIS forwards. Taken from JPMorgan Daily Guide to the Markets – UK, Data as at 09/08/2024.

  • The UK achieved better-than-expected GDP growth in Q2 and, combined with historically cheap valuations, drove mid and small-caps towards long-awaited success – a trend we expect to continue as the country’s economic picture starts to improve. The Eurozone’s GDP picture looks to be similar with rate cuts hoping to improve the economic outlook, whilst the US sinks a little as consumers use up the last remnants of their stimulus and savings.

Source (Left): Bloomberg, J.P. Morgan Asset Management. Forecasts are from Bloomberg contributor composite. (Right) BEA, Eurostat, LSEG Datastream, ONS, J.P. Morgan Asset Management. Excess savings calculated relative to savings rates in Q4 2019. Taken from JPMorgan Daily Guide to the Markets – UK, Data as at 09/08/2024.

  • Politics came to the fore in Europe as the French elections produced a shock result of a centre-left wing coalition as Marine Le Pen’s National Rally party failed to capitalise on an expected absolute majority. In the UK, the Labour party declared a victory with 64% of seats (410 MPs, 320 required for a working majority) but it seemed much more of a huge loss for the Conservative party as Reform UK surged in popularity. It is hoped that a more stable government, possible policy action, infrastructure spending and, as previously mentioned, historically low valuations continue to attract global investors towards the UK market.

Source: Institute for Government analysis of 2024 general election results and parliament.uk, Data as at July 2024.

  • The race for US president in November also took an interesting turn, to say the least. Following on from an assassination attempt on Donald Trump, which boosted his position in the polls, Joe Biden then confirmed he would step aside as the Democratic party’s presidential candidate. Recent polls suggest a neck-and-neck position with the traditional swing states (eg. Arizona, Michigan, Nevada) expected to be the ultimate deciders as they were in 2020.

Source: FT Research, FiveThirtyEight. Latest poll data as at 28/07/2024.

  • Hype around AI continued from Q1 into most of Q2 with some stellar earnings figures from some of the US mega-cap tech giants but concerns remain over potentially unsustainable valuations. Expectations remain that, when the first rate cut is delivered in the US, the broader market recovery will spread into unloved areas of the market, including Value-style and mid/small-cap equities. We have already seen the beginnings of a wider rotation movement in July as the Russell 2,000 (the 1,001-3,000th biggest companies in the US) jumped around 10% in a couple of days on the back of rate cut hopes.

Source: FE Analytics, Data from 31/03/2024 – 30/07/2024. S&P 500 represents the 500 largest companies on US stock exchanges, Nasdaq 100 represents the 100 largest non-Financials companies on US stock exchanges, Russell 2,000 represents the 2,000 smallest companies in the Russell 3,000 index (ie. 1,001-3,000th biggest companies).

  • Whilst China’s benign growth, lack-lustre domestic demand and structural property market problems continue, other Asia Pacific and Emerging Market economies have thrived. This includes India, who now enter their 3rd term of Narendra Modi as their prime minister but this time with his NDA party in coalition. We expect the structural growth story in India to continue as its middle class grows alongside a greater level of urbanisation.

Source: LSEG Datastream, National Bureau of Statistics of China, J.P. Morgan Asset Management, Goldman Sachs Investment Research, NIFD. The index on the right shows the change year-on-year in new house prices in 70 medium and large Chinese cities. Taken from JPMorgan Daily Guide to the Markets – UK, Data as at 02/08/2024.

  • Due to underwhelming domestic growth in Japan, the Yen struggled to keep pace with other currencies and has therefore benefitted exporters at the expense of rising import costs for Japanese consumers. Their government showed signs of propping up the currency if required and re-stated their commitment to continuing their rate-hiking cycle in line with some healthy inflation to revive their historically flat-lined economy as well as their struggling currency. There was a sudden reverse in the strength of the Yen in July with the Bank of Japan’s decision to hike rates by 0.25% but economic weakness concerns remain.

Source: LSEG Datastream, TOPIX, J.P. Morgan Asset Management. Past performance is not a reliable indicator of current and future results. Taken from JPMorgan Daily Guide to the Markets – UK, Data as at 09/08/2024.

  • Our approach to Cash remains the same – whilst Cash rates remain high, we still do not consider it to be worthy of a larger allocation in the long-term for our portfolios. Global economic growth forecasts look to be improving as bond and cash yields fall, therefore we prefer to deploy our available Cash towards growth opportunities.
  • That being said, banks do remain competitive in their offerings of around 4-4.5% for instant access accounts, around 4.4-5% for 1-year fixed rates and around 4-4.5% for 3-year fixed rates, these rates are being reduced in line with interest rate expectations. Transact, as our platform of choice, are the only platform in the market to pass on all interest on overnight client cash earned from 7 major banks and this returned 4.98% AER for instant-access cash savings in June (offering full FSCS protection for each bank), please let your adviser know if you wish take advantage of this. Adviser fees are not typically charged on cash within designated cash wrappers.

Source: Transact ‘Pooled Cash’, Data as at 31/07/2024. The rates shown are the annual equivalent rate of the interest earned by the cash Transact holds on behalf of investors over the past months. The interest rates shown are not guaranteed to remain the same and will fluctuate with market conditions. This in turn may reduce the underlying rate of return on any cash held.

Overall, the changes to the Vizion Wealth portfolios are tilted towards a level of optimism for rate cuts in the UK and the US in the near future with a possible broader rotation towards mid and small-caps both in the UK and globally. We retain our tactical biases towards what we deem to be stronger sectors within each geographical region, as we look towards the next set of rate cuts from Central Banks.

We would also like to announce the release of 2 new styles of Vizion Wealth discretionary portfolios: Passive and Income. The VW Passive portfolios make full use of passive and ‘active/smart passive’ funds to reduce investment costs whilst benefitting from Vizion Wealth’s long-term investment views. The VW Income portfolios are focused on providing a high level of natural investment income (c. 4.3% on average but this will depend on risk profile), which is particularly pertinent with the reduced level of Capital Gains Tax allowance of £3,000 per person in 2024/25.

Our portfolios remain well-positioned for long-term growth by focussing on potential opportunities in both the equity and bond sectors. If you would like to discuss any aspect of your investment portfolio or risk profile, please contact your financial adviser.

Who are Vizion Wealth?

Our approach to financial planning is simple, our clients are our number one priority and we ensure all our advice, strategies and services are tailored to the specific individual to best meet their longer term financial goals and aspirations. We understand that everyone is unique. We understand that wealth means different things to different people and each client will require a different strategy to build wealth, use and enjoy it during their lifetimes and to protect it for family and loved ones in the future.

All of us at Vizion Wealth are committed to our client’s financial success and would like to have an opportunity to review your individual wealth goals. To find out more, get in touch with us – we very much look forward to hearing from you.

The information contained in this article is intended solely for information purposes only and does not constitute advice.  While every attempt has been made to ensure that the information contained on this article has been obtained from reliable sources, Vizion Wealth is not responsible for any errors or omissions. In no event will Vizion Wealth be liable to the reader or anyone else for any decision made or action taken in reliance on the information provided in this article.

Posted by Andrew Flowers

Andrew is the managing partner of Vizion Wealth and has been involved in the offshore and onshore financial services industry for over 25 years. Andrew was the driving force behind Vizion Wealth after years of experience in a number of advisory roles within high profile wealth management, private banking and independent financial advisory firms in the UK.

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