What can investors expect from the second half of 2024?
If you were still under the illusion that investment markets mirrored the wider economy, the first half of 2024 might have finally dispelled it.
From regional conflict and geopolitical tensions to stubborn inflation and the elections that will see more voters than ever head to the polls in 2024, there’s been more than enough uncertainty for investors to worry about. Yet while the UK and global economies have faced plenty of challenges already this year, investment markets have been largely resilient.
In the US, the flagship S&P 500 index rose by around 15% in the first six months of 2024, while Japan’s Nikkei 225 was up 30%, Germany’s Dax by nearly 20% and the UK’s FTSE 100 edged up by 6.52%. So while the news headlines might not make for easy reading and the economic outlook remains muted, those investors that stayed the course have been rewarded.
So, what are the themes to watch out for over the rest of the year? Here’s some to look out for.
AI continues to drive tech growth
Technology has become the most influential sector in recent years, replacing financials as the biggest industry weighting in the MSCI World Index (accounting for almost a quarter of its value). Much of the growth in the tech companies in the first half of 2024 was fuelled by artificial intelligence (AI). Nvidia, for instance, develops the AI chips behind systems such as ChatGPT, and for a short period in June was the world’s most valuable company.
It is now talking up the potential impact of its next products, and a growing range of industries are investing in AI capabilities. But even as the likes of Meta and (Google owner) Alphabet ramp up their own AI activities, the question for investors now is how much further the AI boom has to run. There’s no sign of it tailing off just yet.
Interest rates remain high
While inflation has fallen in recent months, the Bank of England has resisted calls to lower interest rates that have been held at 5.25% since August 2023. Predictions of a June rate cut were wide of the mark; the Bank remains cautious, wanting sustained evidence of lower inflation before it makes its move.
The consensus among forecasters is that unless inflation rises again over the summer, borrowing costs will begin to come down in August or September. What will this mean for investors? As we explain here, lower interest rates should (in theory) be good for equities because of the boost they provide the economy and company earnings. But with any reduction in rates likely to be a ‘soft landing’, such changes may have limited impact on investments.
US election raises investor anxiety
Election results rarely have any lasting impact on long-term investment portfolios (as we explained here) but there’s no escaping the potential significance of the US election in November. The prospect of Donald Trump returning to the White House has concentrated investors’ minds, given the possible implications for global politics and trade. Concerns include the prospect of even bigger trade tariffs than those imposed in his first term, which could have knock-on effects for inflation. Indeed, Moody’s Analytics has warned that Trump policies would slow US growth and see the US enter recession in mid-2025.
Investors may be anxious about the political and economic ramifications of Trump returning to power. In reality, however, factors such as inflation and deeper economic trends are of greater importance.
UK companies in the spotlight
One relatively unheralded theme of 2024 so far has been the level of mergers and acquisitions (M&A) activity involving UK firms. The first five months of the year saw £60 billion of bids for UK companies, a threefold increase on the whole of 2023, according to Ruffer. The rise reflects the view that many UK companies are currently valued below what they’re actually worth, due to broadly negative sentiment towards the UK market in general.
Broker Peel Hunt expects the growth to continue, with both overseas companies and private equity firms looking for deals. This could be positive for investors with exposure to UK funds and/or stocks, as bids for companies typically push up their share prices.
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