The first half of the year has been very pleasing for global equity investors. This can be easily recognized by the fact that the widely known indices of the MSCI and FTSE All World families are all recording double-digit returns by mid-year. In many cases, the returns are twice as high as the expected long-term risk premiums for equities, which are about 7-9% p.a. for large companies. Although there was a small correction in April, this was completely canceled out by the end of June.
The good performance of ‘large cap’ indices is due not least to the very good performance of the so-called ‘Magnificent 7’ (Alphabet, Apple, Amazon, Meta, Microsoft, Nvidia, Tesla) and especially the price explosion at Nvidia. This stock alone has made a significant contribution to the performance of the MSCI World, the FTSE All World, the MSCI World Quality Factor, the Nasdaq 100, and the S&P 500 Index. Nvidia’s share price performance was so strong that the performance of our high-return investment building blocks almost directly reflects whether Nvidia was included in them or not. I have rarely experienced such an extreme situation in more than 30 years in the financial markets; actually, only at the end of the 1990s, when we were able to observe the so-called Internet bubble.
In addition to the shares of Nvidia and the ‘Magnificent 7,’ we should mention the shares of Novo Nordisk and Eli Lilly, which have been equally great performers due to their successful weight management medicines. After such a great performance, none of these companies have room for earnings disappointments.
Apart from such dazzling companies, we were also able to record a very good stock performance in India and Vietnam. Unfortunately, stock markets such as Europe, Japan, and China were unable to build on the successes of the first quarter in the second quarter. This was generally due to home-grown problems:
- Europe saw sharp falls in share prices following the disappointing European elections and new elections in France. In the first quarter, Europe had been able to keep pace with America. Unfortunately, these gains have now been severely eroded.
- In Japan, there seems to be a growing realization that the economy is nowhere near dynamic enough to bring about a fundamental change. Added to this is the fact that Japanese shares are no longer cheap and only appear favorable if compared to America and India. Finally, there are also concerns that the yen exchange rate could move extremely in either direction, making it difficult to project company profits and valuations.
- The positive share price performance in Hong Kong and China in the first quarter was unfortunately nothing but a flash in the pan, as losses resumed in the second quarter. This encourages us to simply turn our backs on these markets.
As far as so-called equity factor investing is concerned, we observed that both the ‘quality’ and ‘momentum’ factors had a very good first half. In contrast, the ‘value’ factor and the ‘quality dividend’ factor underperformed. The same applies to the ‘size’ factor, as shares of small companies had a comparatively poor first half, even if they posted small gains.
Just as global equity markets largely had a very good first half year, we need to take a more differentiated view of bond markets: There are segments, such as global government bonds, whose prices are primarily dependent on inflation trends and associated central bank policies. On the other hand, there are corporate and emerging market bonds, whose performance is primarily dependent on respective debt levels and general market liquidity. Global government bonds with medium and long maturities have lost ground again and are showing losses, whereas corporate and emerging market bonds have had a positive first half of the year. The same goes for high-yield bonds, subordinated debt, and preferred capital.
The small losses on global government bond markets are primarily resulting from the fact that the US economy continued to be very dynamic and the relevant core inflation rates only declined very slowly. This reinforced the view that the US Federal Reserve would not cut interest rates in 2024 at all, or much later and to a lesser extent than had been assumed at the beginning of the year.
Bonds from emerging markets benefited from the generally lower interest rate levels compared to the previous year. At the beginning of 2023, interest rate hikes in America led to major distortions and very high risk premiums in these bond markets. With interest rates of more than 10% in some cases, many countries lost access to the capital markets. This situation has now improved considerably, as can be seen from rising prices and falling bond yields in these countries.
Asian high-yield bonds, which used to be heavily dependent on the development of the Chinese property market, also had a very good first half of the year. The weighting of Chinese property bonds has come down significantly, making Asian high-yield bonds more attractive than they used to be.
The risk premiums for bank capital also fell in the first half of the year, resulting in decent gains. This pleased our community members who opted for the Algebris (Y6) strategy, which we had highlighted after the crisis surrounding Credit Suisse Coco bonds.
In contrast to the strong US economy, many European countries are worried about drifting back into recession. As core inflation fortunately fell faster than expected in many places, both the ECB and the Swiss National Bank were able to lower their reference rates. This, in turn, should help the European economy.
Global commodities also had a very good first half of the year, likely linked to the stabilization of the Chinese economy. Gold also performed very well and continues to be strongly supported by demand in China and other countries that want to reduce their exposure to US government bonds. This trend should continue if the political climate between China, Russia, and the Western world does not improve significantly. Nonetheless, gold currently appears somewhat overbought, which is why interested community members should enter the market at lower prices.
We still do not regard commodities as core investments, but rather as supplementary ideas, which an investor who sensibly combines quality stocks with quality bonds can certainly ignore.
After the small losses of the previous year, the US dollar was able to regain some ground, likely because US interest rates will remain higher than had been expected in January.
