Q2 2024

This publication aims to provide an insight into the changing economic environment and importantly, how this has impacted financial markets and investments. Our Multi-Asset Solutions team at Santander Asset Management UK share their thoughts on the market outlook and how they have adapted investment portfolios to position our clients for the road ahead.

Summary of Quarterly Perspectives content:

• Review of the second quarter of 2024
• Investment performance of different asset classes
• Our expert’s opinion on the investment outlook
• How have our multi-asset fund managers changed their portfolio positioning based on the outlook and our tactical asset allocation
• Summary of the quarterly perspectives

Outlook at a glance

Reviewing the second quarter of the year

Global stock markets rose in the second quarter of the year, although the gains were lower than those achieved in the first quarter. Share prices continued to be supported by hopes of interest-rate cuts from the world’s major central banks as global inflation moderated.¹ The ECB duly obliged in June with a 0.25 percentage point cut² in its benchmark rate. On the other hand, the US Federal Reserve (Fed) and the Bank of England (BoE) slightly disappointed investors by keeping their respective interest rates unchanged, citing persistent inflationary pressures. However, expectations that they would eventually cut rates supported share prices. First quarter corporate earnings growth, especially in the US, generally exceeded investors’ expectations and boosted sentiment.

Many of the major share indices across the globe hit new all-time highs during the period. The US stock market produced better returns than most other global equity markets, driven mainly by large technology stocks such as Microsoft, Amazon and Nvidia, which performed particularly well. The UK also performed strongly, energised by improving economic performance, with the FTSE 100 Index hitting a record high in May.³ Continental Europe and Japan fared less well, impacted by more varied economic data. Emerging markets – notably India, Taiwan, and China – outperformed developed world markets in aggregate. India benefited from soaring economic growth,⁴ Taiwan from recovering export growth and a strong technology cycle⁴ and China from improving economic data.⁵

Economic growth was mixed over the period. The US showed signs of slowdown – gross domestic product (GDP) fell to just 1.4%⁴ annualised growth in the first quarter of 2024, down from 3.4% in the previous quarter, impacted by signs of an easing in its tight labour market. UK growth recovered well in the first quarter⁴ after a shallow recession (defined as two consecutive quarters of negative growth) in the second half of 2023 as consumer confidence improved. Having just avoided a recession, eurozone GDP also increased,⁴ but at a more subdued pace compared to the UK. Meanwhile, Japan’s economy remained markedly fragile and contracted in the first quarter.⁴

^2nd quarter asset class performance

Inflation and interest rates

Inflation and interest rates have been dominating the financial news lately, and for good reason. Understanding these measures is crucial to making informed investment decisions, as they can help explain why your portfolio may be behaving in a certain way. The two charts below provide a view of historic and current trends in these areas, helping you to better understand what’s going on in the current economy.

Inflation and interest rates outlook

When interest rates go up, it becomes more expensive to borrow money, which can lead to a decrease in consumer spending and economic growth. This can cause shares and bonds to lose value and make it harder for companies to generate profits, which can ultimately hurt your investment returns. However, rising interest rates can be a powerful tool for tackling inflation. The slowdown in spending helps to reduce the upward pressure on prices that contributes to inflation. While rising interest rates may have a negative impact, it can play an important role in keeping inflation in balance.

The Fed and the BoE announced in their June meetings that they are making no changes to the current interest rates. Both central banks are concerned about wage growth. Although they are seeing some signs of wage growth cooling on both sides of the pond, the central banks would prefer to see some more encouraging data in the coming weeks to support a rate cut. Inflation in the US is starting to make better progress towards the central banks 2% target and currently sits around 3%⁶, down from 3.3% in May. The progress on inflation in June raises the chances of a Fed interest rate cut, either in September or November.

UK inflation was over 11% in the autumn of 2022, and it is 2% now.⁷ That is its lowest level in nearly three years. The pressures that were pushing up UK prices have eased, and the increases in interest rates the BoE have made during 2021–2023 have also helped to slow down those price rises. We think that UK inflation is likely to stay around 2% in the coming months,partly due to energy prices being lower than they were a year ago. UK inflation is expected to go back up slightly towards the end of the year but it is likely to fall again after that. Although UK inflation is at the BoE’s target, recent inflation data came in slightly higher than expected, pushing back the likelihood of an August rate cut to September.

The ECB were the first of the three major central banks to cut interest rates in June, however in July, they decided to keep rates unchanged. Weak consumer activity is expected to suppress price pressures in the European economy, allowing the ECB to cut rates further with a cut during their September meeting on the cards.

Inflation and interest rates outlook

The ECB were the first of the three major central banks to cut interest rates in June, however in July, they decided to keep rates unchanged. Weak consumer 
activity is expected to suppress price pressures in the European economy, allowing the ECB to cut rates further with a cut during their September meeting on the cards.

Global shares were much more subdued in the second quarter of the year.

The US stock market continued to perform well over the quarter. Despite market correction in April, the S&P 500 was up over 4% for the quarter and on pace for gains of over 14% year to date.⁸ The US markets’ momentum continues to lie in mega-cap technology, as enthusiasm around artificial intelligence (AI) has driven tech sectors and the broader market higher.

UK shares had a better second quarter after a fairly muted start to the year, the FTSE All-Share index increased 3.7% over the period as economic conditions improved.⁹

European shares closed the quarter marginally lower, investors were concerned of the fallout of the European parliamentary elections, the subsequent announcement of a snap election in France and uncertainty over the scope of further rate cuts.

We currently hold a positive view on shares globally, with European and UK markets being our preferred choice on the back of attractive company valuations and our expectation of rate cuts by their respective central banks this year.

Bond outlook

Currently, we are happy to take on additional risk within our funds and are therefore overweight shares relative to bonds.

Where we have a preference in bonds, we favour European government bonds, as the ECB has delivered its first rate cut in June and is likely to make further rate cuts this year. At its June meeting, the Fed trimmed expectations to one interest rate cut for this year, down from three cuts at its March meeting, so we have kept our underweight position in US government bonds. At present, we have a neutral view on corporate, high yield and emerging market bonds. 

Our view is that central banks are on track to bring inflation down to within their target ranges in 2024 and any subsequent rate cuts will be positive for bond investors.

Our tactical asset allocation

Our tactical asset allocation represents our views on the financial markets based on the current market conditions and our own market outlook over the coming months. The below chart demonstrates how our current positioning is either underweight, overweight or neutral when compared to a funds benchmark. Generally, an underweight position means that we think a sector will perform worse than others, so we hold less of it. Holding an overweight position means that we think a sector will perform better, so we hold more of it. A Neutral position means that we think a sector will perform similarly to others, so we will hold a similar amount as the benchmark.

Summary

• Inflation continues to fall and has hit the 2% target set by the BoE in the UK.
• The Fed has only signaled one rate cut this year, leading to bonds having a mixed quarter due to delayed rate cut expectations.
• Shares have performed well so far this year and we have a positive view on shares going forward.
• We are happy to take on additional risk within our funds and are therefore overweight shares relative to bonds.

Note: Data as at 23 July 2024. ¹S&P Global, 18 June 2024. ²Financial Times, 6 June 2024. ³Reuters, 10 May 2024. ⁴Trading Economics, 30 June 2024. ⁵Financial Times, 16 April 2024. ⁶US bureau of labor statistics, 30 June 2024. ⁷Office for National Statistics, 30 June 2024. ⁸Edward Jones, 30 June 2024. ⁹Interactive investor, 30 June 2024.

Important information

For retail distribution. 
This document has been approved and issued by Santander Asset Management UK Limited.
This document is for information purposes only and does not constitute an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Opinions expressed within this document, if any, are current opinions as of the date stated and do not constitute investment or any other advice; the views are subject to change and do not necessarily reflect the views of Santander Asset Management as a whole or any part thereof. While we try and take every care over the information in this document, we cannot accept any responsibility for mistakes and missing information that may be presented.

The value of investments and any income is not guaranteed and can go down as well as up and may be affected by exchange rate fluctuations. This means that an investor may not get back the amount invested. Past performance is not a guide to future performance.

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