Welcome to our latest investment commentary.
This edition covers the third quarter of 2024 and the outlook for the remainder of the year.
STRONG CARRINGTON PERFORMANCE
We are pleased to report that the sustained strong performance of the portfolios has continued. Below we have provided an example of one of our portfolios over the last 2 years, compared with major competitors, who collectively manage over £100bn and represent a strong cross-section of the market.
We are particularly pleased to have outperformed them, demonstrating that bigger is not necessarily better! While this is just one example, the majority of our other portfolios exhibit similar characteristics against their respective peers.
We will now provide further detail on the previous quarter and the key drivers behind the strong performance.
Q3 REVIEW
All portfolios posted positive returns, although Q3 proved to be more volatile than previous quarters. The quarter began with market jitters in August as Japan gradually moved away from its ultra-loose monetary policy. After markets recovered, a similar segment of volatility struck in early September, stemming from US recession fears. However, the quarter ended on a strong note, boosted by positive news from China, where a stimulus package boosted our Asian exposures.
The volatility throughout Q3 was largely driven by fears that the Federal Reserve might be too late in cutting interest rates. Historically, the Fed has led global rate-cutting cycles, but this time, sticky inflation in the US and mixed labour market data delayed action. While other major central banks like the ECB and BoE began cutting rates, the Fed chose to leave interest rates unchanged at its July meeting, maintaining the highest levels since 2001. This sparked concerns that Chairman Powell might tip the US into a recession, however, they did finally join the party a few weeks ago delivering a 0.5% cut.
In Japan, the economic situation was quite different. After years of deflation, Japan finally achieved positive inflation, attracting significant global capital as investors sought refuge from the high rates and inflation in the West. However, Japan’s central bank raised interest rates to 0.25% in late July and indicated for more to come. Whilst still much lower than the over 5% rates in Western economies, this divergence in policy sent shockwaves through global markets. With many investors borrowing heavily from Japan due to its low rates, the increased cost of borrowing, combined with US recession fears, triggered a rush to exit the Japanese market. Japanese equities fell by 12% in a single day—the largest daily decline since 1987—leading to a suspension of trading and ripple effects across some markets, with the US Nasdaq dropping 10% during the August selloff.
In the Carrington portfolios, we anticipated potential volatility from Japan, given the unknown extent of global borrowing tied to its low rates and excessive investor positioning. As a result, we refrained from entering the Japanese market despite its earlier strong returns, thereby protecting the portfolios from this downturn.
Amid the market uncertainty, whether due to fears of recession or geopolitical tensions, gold has been one of the best-performing asset classes, maintaining its reputation as a safe haven during volatile times. Gold prices continue to hit new all-time highs, driven by both investor demand and central banks, particularly China, purchasing gold to diversify away from the US dollar reserves. Gold posted its best quarter in eight years with a 13% return, while gold miners delivered a 15% return. The disconnect between rising gold prices and the lagging performance of gold mining stocks points to the potential for further gains in gold miners, which feature in some of our portfolios.
The quarter ended on a strong note for our portfolios due to our overweight to Asian markets, which experienced significant gains resulting from a substantial Chinese stimulus package delivered.
2024 OUTLOOK
Geopolitics
Geopolitical tensions are escalating globally. In the Middle East, tensions are nearing a tipping point, with Iranian missile strikes on Israel raising concerns of a wider conflict. Oil prices have risen approximately 13% following the attack and could spike again if Israel retaliates by targeting Iranian oil production and export facilities. Such actions could take significant supply offline, driving inflationary pressures worldwide. This could also impact the Russia-Ukraine conflict, as Western leaders previously urged Ukraine not to target Russian oil facilities. If Israel takes such action, it could encourage Ukraine to follow suit, potentially pushing oil prices higher. To safeguard Carrington portfolios against the potential risks of a war outbreak impacting energy markets, we added some energy exposure earlier this year via some broad commodity strategies. They have been appreciating since the escalation.
Russia, facing cold relations with much of Europe, has strengthened ties with China, exporting most of its oil there. While not traditional allies, both countries share a common adversary in the US, UK, and EU. With the EU now imposing a 45% tariff on Chinese electric vehicles and Trump proposing a 60% tariff on all Chinese imports, US/Sino tensions could continue to act as a source of volatility in trade and markets.
The UK
The Labour Party’s victory in the general election came as no surprise, and markets reacted positively, with the FTSE 100 rising and the pound strengthening. However, Chancellor Rachel Reeves is under pressure to revive the UK’s lagging markets, which have struggled to attract global investment since Brexit. Her upcoming Autumn Budget will be closely watched, as expectations are mixed. While UK assets remain undervalued, the new government could provide the stability needed for global investors to reconsider the UK as an attractive opportunity.
The Bank of England was among the first central banks to reach the 2% inflation target, allowing it to cut interest rates in August for the first time since the pandemic. This signalled that inflation was under control and initiated a rate-cutting cycle. In such environments, small companies can outperform. Since the election result was widely anticipated, smaller companies have been performing well for some time and our UK small-cap exposure has been one of the strongest performers in the Carrington portfolios over the last two quarters. We may see some volatility around the budget if BPR schemes are targeted, however, we do not have much exposure to the companies that typically populate BPR products.
The USA
The US market continues to perform well, with the S&P 500 reaching new all-time highs. However, the concentration of the Magnificent 7 raises concerns about diversification risks. In the Carrington portfolios, we have been taking profits from the gains made in US tech during 2024, as we remain cautious about extreme optimism. Nvidia, for instance, doubled its revenues in Q3, yet its stock price fell as expectations were so high that even a strong earnings beat wasn’t enough to satisfy investors. Sustaining this level of growth seems challenging over the long term.
Regardless of the outcome of the upcoming US election, significant government spending is expected, with little regard for the national debt. The US is projected to spend $892 billion on interest payments alone in 2024, exceeding its total defence budget. This financial burden puts pressure on the Federal Reserve to lower interest rates to reduce debt servicing costs, which could lead to aggressive rate cuts and a potential resurgence of inflation. This could in turn pressure technology stocks once again, as was the case in 2022.
Asia
Asia’s performance in Q3 was mixed. India continued to make progress, leveraging its low-cost labour force, but valuations remain high, and concerns linger over its infrastructure’s capacity to support increased production. Japan struggled with interest rate disparity, and its new Prime Minister has been poorly received by markets due to his strained relationship with the Bank of Japan and desire for normalised interest rate policy. More volatility is expected from the region as the Bank of Japan eventually normalise policy and the full extent of Western borrowing in Japan remaining unclear.
China dominated headlines in late Q3, with the People’s Bank of China announcing a significant fiscal stimulus package. This news triggered the largest rally in Chinese stocks since 2008, propelling the Hang Seng to a year-to-date gain of 32%. While China had been overlooked in favour of India and Japan, we viewed those markets as overvalued and took the opportunity to increase our allocation to China when it was undervalued. The stimulus-driven rally provided strong returns across our portfolios in the final days of the quarter due to our material overweight. Although it is too early to say conclusively, we believe the measures may spark a more durable recovery in Chinese markets and we are therefore exploring ways to enhance our exposure.
Strategy
Some points to note around our thinking moving forwards, which generally follow the comments in our previous updates:
- With pockets of the equity markets seeing excess levels of exuberance, in our opinion, we have been looking at ways to reduce the overall valuation of the portfolios. We tend to go against the herd during such times.
- Following the US interest rate cut, we have reduced our exposure to government bonds as the global interest rate-cutting cycle begins. With rapid rate cuts already priced into the bond market, we saw an opportune time to take profits. We are likely to add back to our exposure in the coming months however.
- We continue to hold shorter-term investment-grade bonds, which offer attractive high yields in the current high-rate environment, while default rates remain low.
- Commodities can at times have a negative correlation to equities, and therefore provide some diversification in our portfolios. We continue to hold strategies involving gold and energy to provide protection against geopolitical tensions in Middle East.
- In terms of our equity allocations, our largest equity exposure remains towards US markets, however, we are maintaining good allocations to other markets such as Asia which have started to participate in the market rally.
- Given the ongoing war in Ukraine, we maintain no direct exposure to Europe at present. However, select exposures through global funds are allocated to high-quality international companies. Similarly, while we recognize the longer-term potential of Japan, excessive levels of optimism in the short term prompt us to wait for a suitable entry point into a direct holding.
- Our UK exposure is likely to remain constant, with most of the allocation in large, international FTSE businesses which is complimented by a smaller amount of UK smaller company exposure. We are monitoring this and believe an opportunity will come along next year to add to our smaller companies.
- We continue to hold a significant amount of Asian equities, where valuations remain attractive and the regions generally do not face the same inflation and interest rate policy challenges. While sentiment towards China has been weak, the sentiment has changed recently which has rewarded our patience after increasing China exposure earlier in the year.
Summary
We are pleased with the ongoing performance across all portfolios and continue to monitor the rapidly changing environment. We anticipate some volatility as the US elections approach, but our portfolios are well-positioned to withstand it. We continue to expect global interest rate cuts across major central banks, which could be supportive for markets.
We will keep seeking new opportunities for our portfolios while navigating the current environment as best we can. We hope you find this review informative and welcome any questions you may have.
CHANGES MADE
We made some changes during the quarter. A full account of the changes can be found below:
MARKET INSIGHTS WEBINAR
Lastly, we held our latest live investment webinar on Monday, 14th October.
In addition to our regular investment review and update this quarter, Lucas and Mo were joined by Alistair Candlish, Director of Carrington Wealth Management, who presented this season’s VCT offering. The 2024/2025 VCT season has opened earlier than usual this year, offering exciting opportunities for investors. This was followed by a Q&A session at the end.
You can find a recording of the webinar HERE.
We hope you find this review informative and I look forward to hearing from you if you have any questions.
IMPORTANT: This publication has been prepared for information purposes only by Carrington Investment Consultants Ltd. The value of investments, and any income generated from them, will be affected by interest rates, exchange rates, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets in which it invests. Investors should be aware that the value of units may well fall as well as rise, is not guaranteed and that past performance is not a guide to future performance. Different funds carry different levels of risk and investors may not get back the full amount invested. Carrington Wealth Management is a trading style of Carrington Investment Consultants Limited which is authorised and regulated by the Financial Conduct Authority. Registered office: One Chapel Place, London W1G 0BG. Registered in England, number 3193939. This email and any accompanying documents contain confidential information intended for a specific individual which is private and protected by law. If you are not the intended recipient, any disclosure, copying, distribution or other use of this information is strictly prohibited. You are also requested to advise us immediately if you receive information which is not addressed to you. Data Source: Financial Express. Copyright © Carrington Wealth Management. All rights reserved.