We have seen a significant increase in global market volatility over the past few weeks, with all major global indices experiencing substantial declines followed by an equally rapid recovery. For example, the MSCI World Index fell by 8% in USD from mid-July to the 5th August, but subsequently has risen by over 7% and is now down 1.5% from its high point of 2024. Similarly, our World Stars Global Equity strategy has recovered sharply since the first week of August. This includes a 26% rise in our largest holding of Nvidia from the early August low point.
We think that the market correction was a significant overreaction and are not surprised that our portfolio has rebounded strongly in the last two weeks. It has been a ‘normal’ summer doldrums sell-off after almost 18 months of good performance. Remember the third quarter of last year? We are at a turning point, consumers are clearly getting squeezed by inflation and rates, incomes are growing but have not caught up, but they will, and the Fed has told us they are standing by to cut rates as soon as necessary.
There are several reasons behind the sell-off. Concerns over the spending power of consumers have dominated the headlines across the US, Europe and China, with low-end consumers hardest hit by cost-of-living pressures. The normalization of interest rates has successfully brought inflation under control, in part by cooling the labour market, with concerns about a recession in key markets such as the US coming back to the fore. As we have said before, in the fairy tale Goldilock’s porridge is just right but in real life economic date is always too hot or too cold.
Geopolitical tensions in the Middle East are acting as a pressure point, as is the reversal of the highly profitable trade of borrowing in Japanese yen and investing in overseas stock markets. On a company level, we have seen a desire to lock in profits in stocks that have benefited from exceptionally strong returns.
Also, year-on-year comparisons for many companies are difficult. For example, in its Q2 results LVMH was lapping +17% total revenues and +21% in fashion & leather from Q2 2023. Not even the largest luxury company in the world can grow at that pace two years in a row. We have many other examples. Investors are very focused on earnings growth for this year and next, so a slowdown in growth, whether it is due to cyclical/consumer squeeze or technical/difficult comparisons, is something that many market participants find hard to handle.
We had been anticipating a level of profit-taking in the market but we believe the extent of the recent moves is unjustified and that the derating has gone too far.
The labour market may be cooling but it is doing so from exceptionally strong levels and remains healthy, again, especially in the US. Inflation is moderating and wages are increasing, so we expect the pressure on consumers to lessen and the price/wage equation to reverse. The risk of escalation in geopolitical tensions remains real, but conflicts for now remain highly localised.
