June Market Update 2024

Posted by bedrock on 28th June 2024

June Market Update 28.06.2024

 
“You’ve got to take risks.”

— Emmanuel Macron

Summary

• NVIDIA leapt to become the world’s most valuable listed company last week, only to fall back to the tune of -13% and -$435bn over 3 days. It has since recovered some ground.
• The net effect at equity index level is more of the same: the rally has continued (S&P 500 +3.9% MTD) but remained very narrowly concentrated on Big Tech. The Magnificent 7 gained +10.8%, the Nasdaq +6.7%; in contrast, the equal-weight S&P 500 was down -0.7% and the Russell 2000 -1.5%. The AI theme was still the main show in town.
• We consequently maintain our interest in more neglected, less richly valued corners of the market, such as small-caps, while retaining our long-standing presence in the AI theme.
• Inflation trends and resultant interest rate expectations remained a key determinant. US CPI came in cooler than expected, bolstering rate cut expectations. We share the market expectation for a Fed cut in the back half of the year but, given the November election, the September FOMC meeting will be key – as will the data running into it.
• Elections made themselves felt in June, including results that surprised in their degree, if not their direction, in a trio of big emerging markets: India and South Africa (surprisingly weak wins for incumbents) and Mexico (surprisingly strong).
• Markets will keep an eye on ballot boxes in the coming weeks, with elections in the UK and – especially – France. The outcome of the former looks set (Labour win, already well priced-in); the latter may prove more dramatic, keeping French asset volatility elevated.

More of the same

Equity markets had little new to say in June. Yes, the S&P 500 struck new all-time highs, reaching 5,487 points last week (and +3.9% MTD). But it was again a very narrow market, with the usual suspects leading the way. The Nasdaq gained +6.7% on the month and the Magnificent Seven index of big-tech supremos (…and sagging Tesla, still along for the ride) was up +10.8%. In contrast, the equal-weight S&P 500 dropped -0.7% on the month and the small-cap Russell 2000 -1.5%. Amidst all this, AI chip leader NVIDIA leapfrogged Apple and Microsoft to become the most valuable listed company in the world, at $3.34 trillion. Its market cap was ‘just’ $390.5bn the day before ChatGPT launched in November 2022 … a nearly ninefold increase.

The rally’s drivers, too, remained familiar. The AI theme reigns supreme, while inflation data and resultant interest rate expectations again set the macro framework for more tech gains. NVIDIA and other chip companies clutching its coat-tails have generated three-quarters of the S&P 500’s dollar gains since March; the other Big Tech stocks have done the rest. They were helped by the latest inflation prints in June: US CPI followed its April cooling with a downside surprise for May, dropping to +3.3% YoY; monthly core CPI growth decelerated to +0.3%, its slowest since August 2021. Factory gate-focused PPI inflation was also unexpectedly slower. This brace of cooler prints bolstered market expectations for Fed rate cuts in the course of the year.

We, too, retain our expectation of at least one Fed cut this year. A July move is highly unlikely but a first cut may yet come in September. As the last meeting before November’s presidential election, the September FOMC will be crucial – as will the data running into it. Two months of deceleration do not yet make a sustained trend, and a surprise rise in Australian inflation this month showed the upside risks. Still, we remain confident that peak rates are behind us, meaning we will keep an interest in extending duration in the coming months. In the meantime, the ECB stepped ahead of the Fed and began its own cutting cycle this month.

“We remain confident that peak rates are behind us, meaning we will keep an interest in extending duration in the coming months.”

Jensen Huang flies too close to the sun

Slightly masked by the above account was the small matter of half-a-trillion dollars of market value being toasted in three days. NVIDIA’s meteoric rise to the very top proved ephemeral – for now, at least. Having claimed the crown last Tuesday, the AI chip giant began a -13% retracement, costing $435bn in market capitalisation and moving the stock back to third place.

After this Icarus-like tumble for NVIDIA CEO Huang, the stock has stabilised but the downshift underscores for us the risks of such a top-heavy market with one (artificially intelligent) thing on its mind – and sustains our interest in more neglected, less richly valued corners of the market, such as small-caps. We still like the AI theme and again highlight that NVIDIA’s earnings growth has been comparably dramatic to its share price rise. But its forward P/E ratio is now 49x – richly valued, though not off the charts – and shareholders in the company’s customers (largely the other Big Tech outfits) will soon want to see some incremental revenue return on all their lavish AI spending.

Of ballot-boxes and trading consoles

Still, June also showed that there is more to markets than AI and rate whispering: electoral politics can also move markets. 2024 has rightly been touted as a standout year for democratic elections: never in history has a larger share of humanity voted in one year. And the action continues in the coming weeks, as more voters head to the polls.

“June also showed that there is more to markets than AI and rate whispering: electoral politics can also move markets.”

A trio of big EMs got the ball rolling early in June. Each threw up surprises, prompting sizeable market price responses. The surprises were less in the direction of the outcomes, more in their degree. In both South Africa and India, incumbents won surprisingly weak victories; in Mexico, the win was strikingly pronounced. In India, where markets have been buoyed by strong economic growth and the BJP was gunning for the two-thirds majority needed to change the constitution, a chastened Narendra Modi begins an historic third term instead dependent on a fragile coalition. Indian stocks took a knock (Modi had predicted his expected landslide would spark a rally) but have since recovered and we retain our positive – but selective – view of Indian equities (though Japan is our preferred Asian market for now).

European Parliament elections followed. These saw the far right make big advances in France and Germany (the two largest member states) but at the Union-wide level, the far-right wave was weaker and ultimately the centre held. But these Euro results were less interesting in themselves than in what they provoked…

“A choice between cholera and the plague”

One vote not on any political calendars at the start of this year of democracy was parliamentary elections in France. Reacting to the far-right Rassemblement National’s (RN) strong European showing, President Macron surprised all but his closest advisors by calling snap parliamentary elections for next week (otherwise not expected until 2027). This is proving quite the gamble – as holders of French financial assets have become all too aware. Macron evidently hoped to call French voters’ bluff; a third of them may have backed RN in the lower-stake European elections but would they really countenance them running the national government?

There is no sign yet of voters rallying back to Macron’s centrist camp; the RN leads polls on c.35%, versus c.20% for the president’s group. And Macron surely had not reckoned with a surprise coming together on his left flank. Normally fine exemplars of the leftist tradition of internecine bickering, four of France’s left-wing parties have formed an alliance, the Nouveau Front Populaire (NFP), including a joint programme and a candidate pact. Though it includes the rump centre-left socialists, the greens and the communists, the NFP is dominated by the populist left-wing La France Insoumise, led by the divisive Jean-Luc Mélenchon. The polls have the NFP in second place, on 28%. Macron’s Ensemble coalition finds itself squeezed between these two extremes and facing a wipeout via French elections’ two-round structure.

Markets have not liked a turbulent, lightning election campaign in which radically unorthodox policy platforms have surged. The CAC 40 equity index has slid -5.5% since Macron called the election, while the risk premium on French sovereign bonds has leapt up; the spread of French OAT yields over German Bunds reached 83bps, the widest since 2012 and the Euro crisis. Based on current polling, a plausible development is for the RN and NFP to top this Sunday’s first round, with Ensemble a distant third, leaving anti-RN voters to rally to the left as the most likely way to block the far right in the runoff a week later – representing the difficult choice we have borrowed from a French business executive quoted in the press to head up this section. Equally, the anti-far-right cordon sanitaire approach has weakened over the last decade as RN leader Marine Le Pen has sought to detoxify the party’s image, including by purging her father’s even more radical followers. This means that the RN may also claim a majority.

“Markets have not liked a turbulent, lightning election campaign in which radically unorthodox policy platforms have surged.”

Both the RN and NFP are vehemently anti-Macron and have promised a sharp break from his pro-business stance and reversal of key policies such as the raising of the state pension age. Both have made expensive promises, despite public debt already at 110% of GDP and a budget deficit of 5.5% (though the NFP’s proposed tax hikes at least plausibly balance the books, in the near term). Macron’s camp has warned of a Liz Truss-style blow-up. While the RN’s prime minister candidate has said he would only form a government if given an outright majority, and a hung parliament also remains very much on the cards, the Elysée and the government may soon be talking at very cross purposes. French markets look set for more turbulence.

In ‘poll’ position

On this side of the Channel, the outcome of next week’s general election seems more clearcut. Incumbent Prime Minister Rishi Sunak had also surprised observers in calling a July election – though it was far less of a thunderbolt than Macron’s announcement. Sunak also allowed his troops more time to muster, with a six-week campaign (versus three in France). He has not used this additional time well, leading a hapless campaign marked by some stunning own goals. The upshot is that an already unpopular governing party with an already unloved leader have lost further ground. Conservative messaging has tacitly accepted that the goal is a less-bad loss, not victory (the party is explicitly pleading for enough votes to constitute a robust opposition, never mind to form a government).  

So the polling is clear: the Labour opposition should be cruising to victory, currently commanding a 20-point lead. There may be scope for last-minute surprises and polling errors, while the idiosyncrasies of Britain’s winner-takes-it-all elections at constituency level mean the scale of the likely Labour majority can be hard to predict. But we are confident in our base case that Labour’s Keir Starmer will be Prime Minister by the time of our next note.

“So the polling is clear: the Labour opposition should be cruising to victory, currently commanding a 20-point lead.”

What does this mean for investors and the economy? We expect negligible immediate response from UK financial assets; a Labour victory is well priced in at this stage. Moreover, Starmer has ensured that the likely policy choices before the British electorate are much less stark than what’s in front of their friends across the Channel. Nothing radical is in the offing, though the closing of a tax loophole for private equity and the end of resident ‘non-dom’ status will rankle with some. British business appears to be looking forward to a return of what they hope will be stable and pragmatic governance. However, Labour have so far pledged little on a scale apt to remedy the British economy’s multiple, sizeable challenges. In time, this omission may come to show and weigh on the UK outlook, not least because tax rises or spending cuts will likely be required to bear down on government debt and close the UK fiscal deficit. Let us hope that Labour put more meat on their plans for us to chew over in our coming notes once they are in office.

“British business appears to be looking forward to a return of what they hope will be stable and pragmatic governance.”

If you have any questions about the themes discussed in this article, please do not hesitate to get in contact with us: info@bedrockgroup.ch