The third quarter, notorious for its high volatility, is now behind us. In fact, the crash in Japan on August 5th was accompanied by historically high levels of more than 60 in the so-called VIX index, which measures the volatility of the S&P 500. An average volatility reading would be between 10 and 20, whilst elevated readings would stop around 40. Levels of 60 and above were only seen during the Covid market meltdown. Investors impressed by these fluctuations will be surprised to realize that at the end of the quarter, despite a crash and all the noise, there were ultimately very pleasing gains to report. Based on the MSCI AC World Index, which comprises all major global stock markets, there was a rise of almost 6% in USD.
A decision to exit the stock market in May (sell in May, go away…) would therefore have been a big mistake! Anyone who pursues a coherent strategy and, like the clients of Das Family Office PTE. LTD., has a well-constructed portfolio, should therefore stay the course and ignore all market spasms. The most important dates of the quarter were probably the 7th of July and the 5th of August, as well as the 18th and 24th of September. This was because on the 7th of July, sustained lower inflation data was reported in the United States, which significantly stimulated global bond markets. On the 5th of August, there was a quasi-historic equity crash in Japan, which also led to distortions in world equity markets. On the 18th September, the US Federal Reserve lowered its key interest rates by 0.50%, which was very well received by financial markets. Finally, the Chinese central bank and various ministries announced concerted measures on the 24th of September to stabilize the Chinese stock markets, which led to an unexpected ‘price explosion’.
All in all, the third quarter brought much joy to global equity and bond investors. This can be seen from the fact that the widely recognized indices of the MSCI and FTSE Russell families all posted returns of around 18% at the end of the quarter. This means that 2024 returns are now twice as high as the long-term expected risk premiums for equities, which are around 7-9% p.a. for large companies. Hong Kong shares went from being the loser to the winner in global markets within a week.
In contrast to the first half of the year, in which global indices were mainly driven by the share price of Nvidia, there was a significant market rotation in Q3, resulting from the expectation of falling interest rates in America. The ‘Magnificent 7’ (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, Tesla) therefore had a decent quarter but, except for Meta, were unable to record new highs.
Outside America, almost all global stock markets closed the quarter with good results. Even the Chinese stock markets, which we had largely ignored, literally shot up. Shares in small and medium-sized companies lagged those of large companies with single-digit gains but picked up some speed in September.
As far as the four so-called MSCI factor indices are concerned (momentum, size, value, and quality), we continue to observe that the quality and momentum factor indices performed better than the MSCI World Index. Size and value factor indices underperformed. The MSCI World Multi Factor Index, which gives equal weight to the four factors, performed almost in line with the MSCI World Index. Dividend stocks also had a good quarter but couldn’t keep pace with the broader market.
After global bond markets struggled with minor losses in the second quarter, the third quarter saw almost exclusively good news. This was mainly because the sustained decline in inflation in America encouraged investors to buy more bonds as they were considered cheap. Except for global inflation-linked bonds, there were notable gains in all bond market segments.
Global REITs also had a very good quarter. This was certainly due to the various interest rate cuts by central banks, which heralded the end of the global rise in interest rates. As the property sector generally works with a lot of debt, it is now benefiting from falling financing costs.
Global commodities had a mixed quarter but benefited considerably from China’s announcements to stabilize its economy. In contrast, gold enjoyed another very good quarter and even outperformed the returns of global equity markets. 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 we’d recommend buying only at lower levels. We still do not regard commodity investments as core portfolio components, which an investor who sensibly combines quality shares with investment-grade bonds can safely ignore.
