Overall, the second quarter built on the successes of the first, with risk assets delivering another set of positive returns to investors.

The economic momentum of the first quarter of 2024 continued into the second, and the last three months were another positive period for equity markets. Initially, investors aggressively dialled back expectations for central bank rate cuts, as the US overheating worries that had taken root towards the end of the first quarter meant strong April data was poorly received by markets. But as the quarter progressed the worst of these worries abated, and soft-landing hopes revived. In Europe, economic momentum also remained positive as the effects of the cost-of-living shock continued to abate.

The price of this continued economic growth was sticky inflation and while investors’ worries at the end of the first quarter proved overdone, services inflation remained obstinately above levels that are consistent with central bank targets. As a result, rates markets still expect far fewer cuts by Western central banks than they did at the beginning of the year.

Against this resilient backdrop, developed market equities delivered positive total returns of 2.8% over the quarter. These returns were concentrated in larger companies, while rate sensitive small cap stocks and REITS suffered from confirmation of the higher-for-longer interest rate environment. Conversely, fixed income investors had to endure another quarter of negative returns with global investment grade bonds delivering negative returns of -1.1%.

Companies exposed to artificial intelligence continued to outperform other areas of the market, and a strong earnings season for US tech companies meant global growth stocks were once again the top performing asset class, delivering 6.4% over the quarter. This performance was concentrated in the US and value stocks outperformed growth stocks over the quarter in Europe, Japan and the UK.

Moves by the Chinese authorities to support the real estate sector provided a boost to Chinese equity markets. This development, combined with strong performance from the artificial intelligence exposed Taiwanese stock market, helped Asia ex-Japan equities deliver strong returns of 7.3% over the quarter. The weight of Asian markets in the broader emerging market universe also meant that, despite lacklustre returns in Latin America, emerging market equities outperformed their developed market counterparts to deliver quarterly returns of 5.1%.

The outcome of the European parliamentary election caused President Macron to announce a snap election in France. Market concerns about the possible outcome introduced significant volatility. The French equity market fell -6.4% in June and hampered broader European returns, which were just 0.6% over the quarter. In the UK, the improving economic situation helped the FTSE All-Share deliver 3.7%.

After an initial pick-up in April, US economic data softened over the quarter and has generally been coming in below consensus since early May. Despite this, the Federal Reserve (Fed) struck a hawkish tone at its June conference with all but one cut being removed from the 2024 projections. That said, soft US consumer data meant that investors were slightly more hopeful for policy easing, and rates markets continue to point to two cuts by the end of the year. This more sanguine investor view meant that, despite the changes to Fed projections, Treasury yields ended the quarter where they started, and US Treasuries were the only major sovereign market to deliver positive returns with gains of 0.1% over the quarter.

The European Central Bank (ECB) became the latest developed market central bank to cut interest rates. This move was heavily signalled prior to its June meeting, but stickier-thanexpected services inflation meant that the ECB was keen to stress that the path to any further policy normalisation is heavily data dependent. Despite the lowering of policy rates, the fallout from both the European parliamentary elections and the announcement of snap French elections meant that European sovereign yields rose, and European government bonds delivered negative returns over the quarter.

Similarly, sticky services inflation dashed hopes of a June rate cut in the UK, despite the Bank of England (BoE) signalling it could have been an option. Supportive base effects meant UK headline inflation returned temporarily to target in June, but this drop in inflation was widely expected and a series of strong wage prints plus a forecast reacceleration in inflation meant the BoE felt unable to cut rates. However, the BoE did leave open the possibility of a move in August. Yields rose over the quarter and UK Gilts delivered negative returns of -1.1%.

More broadly, the benign macro environment supported the riskier segments of fixed income. Resilient economic activity in the second quarter fed through into resilient corporate earnings and, as we discuss in our mid-year outlook chapter Higher for longer is good for fixed income, these resilient earnings meant that both default rates and spreads remained contained. European high yield and US high yield were the top performing fixed income sectors, delivering returns of 1.5% and 1.1% over the quarter, respectively. Both sectors were supported by strong coupon payments and the ancillary benefit of being less sensitive to the moderately higher sovereign yields experienced in Europe and the UK.

Overall, the second quarter built on the successes of the first, with risk assets delivering another set of positive returns to investors. Despite some cracks appearing in the US consumer data towards the end of June, economic momentum in general remained positive and equity markets were buoyant as valuations remained high among the mega-cap tech names.

While the cost of this continued economic resilience was felt primarily in core fixed income, multi asset investors should take heart from the fact that, even though the asset class has underperformed in the short term, the overheating worries of April appear in the past and markets are confident the next move for the major developed market central banks is to ease policy rather than tighten. As a result, the medium-term outlook for fixed income still looks attractive.

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