- Bitcoin the best-performing asset class in first half of 2024
- Commodities outperformed equities, despite the enthusiasm for AI-related stocks
- Bonds lagged yet again
- Commodities and fixed-income asset classes may be sending a different message from equities (as may currencies) – someone has to be wrong!
“The eighteenth-century champion racehorse Eclipse was so dominant in his eighteen undefeated races that the phrase ‘Eclipse first, the rest nowhere’ entered the English language and investors could be forgiven for thinking that technology and AI-related stocks were just as all-conquering in the first half of 2024,” says AJ Bell investment director Russ Mould. “However, it was not quite that simple even if NVIDIA generated portfolio-boosting returns for those who held it. By asset class, Bitcoin topped the list, with commodities outperforming equities on a global basis and fixed income bringing up the rear, to perhaps suggest that the cosy consensus view of cooling inflation, a soft economic landing and interest rate cuts is not guaranteed to pan out as many expect.
“The prevailing narrative in the first half of 2024 in stock markets was one of the Goldilocks economy – not too hot as to force interest rates to stay higher for longer, but not too cold as to lead to disappointing corporate earnings and dividends.
“In effect, investors seem to be expecting a return to the low inflation, low growth, low interest murk of the 2010s, which created the perfect environment for long-duration assets such as technology and biotechnology in equities and in many cases government bonds – in other words options which offered either the prospect of secular long-term growth almost whatever the economic backdrop or some degree of secure income over a lengthy period of time.
“But the picture was not quite so simple.
“Equities’ world view was not necessarily shared by currency, commodity or fixed-income markets.
“In currencies, Bitcoin shot higher (and the Japanese yen and Chinese renminbi dived lower).
“Commodities outperformed equities, at least on an aggregate, headline-index basis and bonds remained concerned by sticky inflation and far fewer rate cuts than fixed-income investors had been expecting (even if they got eighty worldwide, the Bank of England and the Fed delivered just one between them).
“The outperformance of Bitcoin and commodities speaks of some investors looking for ‘hard’ assets, where supply cannot be conjured out of thin air by central bankers or governments, as is the case with money and sovereign bonds. It also harks back to the 1970s, when commodities, notably gold and oil, did better than everything else during a period of lofty inflation (even stagflation) and also geopolitical tension, most notably in the Middle East.
“Ongoing concern over inflation, and the slower-than-expected pace of rate cuts from Western central banks, also informs how bonds lagged again in the first six months of 2024, to continue a trend that can be clearly seen over the past five years.
Source: LSEG Datastream data. Capital returns on dollars
“This is not to say that commodities and fixed-income investors, and currency and crypto traders, are ‘right’ and equity investors are ‘wrong’ – but they cannot all be correct, so someone may be in for a surprise at some stage. That might be equities if rate cuts do not appear, as the economy runs hotter than expected, or earnings downgrades gather, should the soft landing prove to be harder than anticipated.
“Investors with long memories or a keen interest in market history will remember how even frantic rate cuts from the US Federal Reserve in 2000-2002 and 2007-09 did nothing to initially stem either a downturn or spectacular market busts, as technology, media and telecom stocks unravelled in the former case, and complex property-related debt instruments unravelled during the latter episode.
“For the moment, however, America’s NASDAQ Composite and S&P 500 are roaring away and partying as if, well, it’s 1999 (even if that did not work out too well last time around).
“India’s BSE Sensex benchmark has again done very well, even if the less-than-sweeping victory for Prime Minister Narendra Modi’s BJP in the general election has given some pause for thought and political uncertainty has hobbled France’s CAC-40 after its bright start to 2024, amid worries that a swing to the right would unleash free-spending populist policies. Brazil’s BOVESPA index has become tail-end Charlie in 2024, as the combination of rate cuts from the Banco do Brasil and possible fiscal stimulus from President Luis Inácio Lula da Silva also stokes fears of persistent inflation amid a dovish policy turn.
“The UK’s FTSE 100 seems to be weathering its general election campaign fairly well, perhaps because the result is seen as a foregone conclusion and because the assumed victors, Sir Keir Starmer’s Labour Party, continue to make all of the right noises (from the selfish perspective of financial markets) when it comes to taxation and spending.
“Japan may be setting new highs in yen terms, but ongoing currency weakness is depriving overseas investors of a lot of their share price gains, and China’s stock market remains mired in gloom over the real estate bust and how international tariffs could stop exports taking up the slack. All eyes are now on July’s Third Plenum to see whether the Communist Party moves to boost private consumption in an attempt to meet its GDP growth target for the year.
Source: LSEG Datastream data. Capital returns on dollars
“By equity sector, the dominance of the NASDAQ and S&P 500 give a clue as to which grouping is leading the way – it really is Technology first and the rest nowhere.
Source: LSEG Datastream data. Capital returns on dollars. Based on S&P 1200 Global indices
“Financials come next, as they look to get excited about rate cuts and the sort of economic soft landing which would support earnings by staving off a spike in provisions for debt debts, while Energy’s third spot may surprise many, given the ongoing global drive to move toward renewables from hydrocarbons. This transition is taking longer than many would like, and the oil and gas majors are generating dollops of cash, much of which is going straight back to shareholders. The debate over the ultimate source of all of the power that will fuel AI data centres and crypto mining also refuses to go away, with many seeing oil, gas and coal as sources of consistent, baseload energy supply for longer than the producers’ current lowly equity valuations would imply.
“The poor performance of Materials does not gel with the outperformance of commodity prices, so either mining prices are set to go higher or raw material prices lower at some stage, while Real Estate stocks remain beset by concerns over what working from home and the continued onslaught from online retailers will mean for the valuation of bricks-and-mortar offices and stores. The lack of rapid interest rate cuts in the West is not helping this sector either, although the quickfire reduction in borrowing costs seen in the UK in 1992-93 and the subsequent surge in real estate stocks may enough to persuade some portfolio builders to take a contrarian stance here.
“Fully paid-up members of the awkward squad will also continue to argue that the dominance of US equities, and technology stocks within that (in the form of the Magnificent Seven) is both unhealthy and unsustainable, especially if that dream scenario of low inflation and low interest rates fails to materialise.
Source: LSEG Datastream data, in dollars
“The S&P is now more than 60% of global market capitalisation, as benchmarked by the FTSE All-World. That is where it peaked in 2000 just as the technology, media and telecoms bubble popped.
“Moreover, the US market is less balanced now than it was then, as the Magnificent Seven represent 34% of the S&P 500’s total valuation, or a fifth of global stock markets’ value. If everyone is sat on the same side of the boat, they either have to shuffle to the other side or it tips up in the end, and it will be interesting to see what triggers the shuffling – as something surely will one day.
“Prior examples of similar imbalances in the US market, with technology stocks in the late 1960s (the so-called ‘Go-Go years’), the Nifty Fifty in the early 1970s and tech, media and telecoms stocks in the late 1990s all ended with a loud bang as the most favoured stocks ultimately proved unable to sustain their lofty valuations even if, in the end, they provided everything that was expected of them by way of earnings and cash flow (although heaven help them if they did not do so).
Source: LSEG Datastream data
“No-one knows what could jeopardise the Magnificent Seven’s stock market dominance, or when it will occur, but possible candidates include inflation proving stickier, and nominal GDP growth higher, than expected.
“This is, after all, what happened in 2022, which is not so long ago, even if its harsh lessons appear to have already been forgotten. As inflation reared its head, investors fled secular growth stocks in the view that if there was plenty of nominal growth available from downtrodden cyclical stocks there was no reason to pay such high valuations for the former when the latter were so cheap.
“From its peak in November 2021 to its trough in December 2022, the NASDAQ Composite swooned from 16,000 to 10,200, a one-third swan dive.
Source: LSEG Datastream data
“Perhaps not uncoincidentally, that is when the CRB Commodities index began to put on a spurt after years of lying dormant.
Source: LSEG Datastream data
“It may just be that Russia’s invasion of Ukraine and the conflict in Gaza have a lot to do with the renewed strength in raw materials prices, and central bankers will certainly be hoping that is the case. But if the CRB’s advance to its highest mark since 2013 is more a result of incipient inflation, underinvestment in new sources of vital raw materials and even a geopolitical tussle for control of supply then the world could look very different from the 2010s when, from the narrow perspective of investment, long-duration assets like bonds and secular growth stocks were the only game in town.
“Despite the AI hoopla, the CRB Commodities index has outperformed the FTSE All-World in the first six months of 2024 and watching the relative performance of these two benchmarks could be one way of working out whether inflation – and higher nominal GDP growth – are coming or whether central bankers really are in control and return the world to a new era of low growth, low inflation and low interest rates, even after more than a decade of extremely loose monetary policy and experimentation.
Source: LSEG Datastream data
“It is far from conclusive, but commodities have been gently outperforming since the turn of the decade.”
