7 Minutes on Markets - Q3 2024 Market Update

Ben Kumar: Hello, everyone, and welcome to another edition of 7 Minutes on Markets. I'm Ben Kumar, the Head of Equity Strategy, and I'm joined by Sam Hannon, one of our Investment Managers.

Sam Hannon: Hello.

Ben: What we're going to do is a quick little tour around the world – what's been going on, what we think is going to happen in the future and how portfolios are positioned. And Sam, I think maybe one of the best ways to describe how we're thinking about the world is two key factors: rotation and rates. Now, when it comes to rotation, we've seen for the last couple of years big tech dominate… absolutely dominate almost every other market. But there are a few signs, aren't there, that we're starting to see that change. You've got other areas coming a little bit more into fashion.

Sam: Yeah, it's been interesting. You've seen markets, particularly in the US, being driven by just seven names, and this kind of concentration has meant that, unless you're in those seven names, you weren't really at the party - things weren't going on as you would expect. However, what we're starting to see is that rotation take place and people are looking into the unloved areas in the market. So we've seen healthcare perform really well over the last quarter, and areas like metals and mining or climate change where people are kind of saying, "hang on, let's take a step back; seven businesses driving market returns is a bit of a concern, let's have a look elsewhere and see what areas in the market could provide good returns going forward."

Ben: And I think with that rotation away from the Magnificent 7, those big tech companies, there's probably an important point to note which is that you don't have to see negative returns for the rotation to take place. While the big tech companies might fall in value, if other sectors are doing well, if things are broadening out and the banks are doing well and the healthcare sector is doing well, you can still have positive returns over the course of the whole year. And that's something – we'll talk about the positioning at the end – but that's something we definitely believe is in play.

Sam: Yeah. And it's interesting, as you say, Ben, we're not expecting these businesses to disappear. We're not expecting Microsoft to fall apart overnight. We're expecting these businesses just to slow down. Their things aren't going to grow as extraordinarily as they have been. We're just going to see new winners in the market.

Ben: OK. So then, thinking about the environment in which all this is taking place, what do we think about the US economy? You know, are we off to the races? Are we staring over the edge of an abyss? What's the story?

Sam: Well, it's been an interesting few years for the US, particularly post-Covid, where you've been, you've seen this crazy kind of, a bit like the S&P 500. You've seen these crazy growth levels that really no one expected, particularly looking back at how bad 2022 was for markets. But then, going into 2023, everyone thought there'd be a slowdown. But actually, things grew at a really, really steady pace.

Ben: Everyone was looking for a recession and it didn't turn up.

Sam: A hundred per cent, and what we've seen is that the key kind of driver there was the consumer. In the US, the consumer is a big part of that economy. But where we started to see things slow down, people's stimulus checks from Covid have kind of burnt a hole in their back pocket. People aren't spending as much, and that was the key driver for keeping the US economy growing. And we're just starting to see that slow down. Again, we don't believe that there's going to be a recession in the US. But there are signs that things are slowing and we do believe that the US economy will trop rather than canter.

Ben: And I think we've seen a couple of good examples, and you can see it in company results. There's always something interesting about people waiting for economic data from governments. But actually, if you look at the businesses on the ground, you get quite a nice picture of what's going on. So, people having a little bit less free cash to spend in the US means that companies like Nike, you know, doing premium sports goods, not doing so well. Whereas companies like Walmart, for example, a bit more of a bargain, bit more of a discount, are seeing their revenues, their sales, pick up. But it's not quite the same story in the UK, is it?

Sam: No, it's a really interesting one. When we speak about the US consumer being the driver in 2022 and 2023, keeping things afloat. But in the UK, that pain that we're starting to see now in the US happened back at the back end of 2022-2023. So if you look now, as you've said, Ben, at companies' results and where people are spending the money, the UK consumer is going back into those areas. Maybe they have a bit more spare cash in their pocket. They can do the weekly shop Marks & Spencer's. They can buy that new pair of Nike trainers in JD [Sports]. Businesses that were neglected a little bit in 2022-2023, where we had that cost of living crisis combined with heightened interest rates, meant that people step back from some of their day-to-day spending or their luxury spending. But now, unlike the US, the UK consumers are coming back to the play. They come in and do it, and they're spending a little bit more.

Ben: Yeah, it's sort of those everyday, treat yourself luxuries, right? And Marks & Spencer's ready meal rather than Sainsbury's. Or, you know, a new pair of Adidas trainers rather than making yours last another couple of months. I think that's really interesting and OK, so we've got a situation where economies like the UK may be doing OK, the US slowing a little bit, but not bad. That's probably got implications for interest rates. And what is it that the market expects and then kind of what do we expect?

Sam: Yeah, it's interesting. I think there's been plenty of talk recently about markets and how they price rate cuts and things like that because we have so much information now from the federal banks and the national banks. But really, we think over the next few months we'll see one cut probably. Inflation remains sticky in the US and given these economic constraints that you are starting to see, we think the Fed will need a little bit more room to play with. They'll need to be able to pull some levers just in case things slow down more than they expect.

Ben: So you mean they don't want to cut rates a little bit now in case they need to cut them a load in the future?

Sam: Exactly, just to make sure that they have that breathing room to make action or take action when they need to, and that's very similar in the UK, albeit in the UK we've had some weird inflationary events like Taylor Swift in the summer, or the Euros, where inflation has remained sticky, and one thing the Bank of England don't want to do is artificially cut rates because the markets are telling them to do so just to please… just to fuel inflation even more. So, we are keeping an eye on that data, much like the Bank of England.

Ben: And I think it's important to note rates are not going to go back to zero unless there is a big, big crisis. We don't see a crisis coming, we don't expect one, and therefore, anyone thinking about interest rates should be thinking about, you know, 2% to 3% being the norm for the next few years rather than straight back to zero. So with that in mind I guess a simple summary would be that we're kind of neutral on bonds - rates might come down, but it's not going to be sharp, you've got a lot of protection there. When it comes to equities, we're being a bit cautious – just a little bit, but looking for opportunities outside of the big tech stocks, places like healthcare, unloved places, even in the UK, some of those smaller businesses, those JD Sports, those Marks & Spencer's where, you know, the consumer's OK. So it's quite a balanced situation and the way I'd finally sum it up is that most of the time in an economic cycle, things are going OK. You don't need to be massively overweight. You don't need to be massively underweight. You just need to be cantering along.

Sam: Yeah, exactly.

Ben: That's it from us. Thank you very much, and we'll speak to you next quarter.