Q2 2024
In the second quarter (Q2), strength in some Asian markets propelled emerging market equities to outperform their developed counterparts. Stocks related to the artificial intelligence (AI) theme continued their robust performance. Despite the European Central Bank cutting interest rates, persistent inflation kept other major central banks on hold.
US shares posted gains in Q2, driven by the information technology and communication services sectors. Enthusiasm around AI bolstered related companies, supported by strong earnings and positive outlook statements. However, the materials and industrials sectors lagged behind.
Within the financial sector, several US banks announced plans to increase dividends after successfully passing the Federal Reserve's annual stress tests.
The timing and extent of interest rate cuts remained a central concern for markets during the quarter. Early worries about the US economy overheating led to negative reactions to strong economic data. However, as the quarter progressed, optimism for a soft landing grew. The latest "dot plot" from Fed policymakers indicated only one rate cut for the year.
Annual US inflation, measured by the personal consumption expenditures index, slightly eased to 2.6% in May from 2.7% in April. The labor market remained robust, with 272,000 jobs added in May, according to the Bureau of Labor Statistics.
Eurozone shares declined in Q2 amid uncertainty from the announcement of parliamentary elections in France and reduced expectations for significant interest rate cuts. The information technology sector gained, particularly semiconductor-related stocks, while the consumer discretionary sector saw declines due to weakness in automotive and luxury goods stocks.
In early June, the European Central Bank cut interest rates by 25 basis points, but further cuts may be constrained by persistent inflation. Annual inflation in the euro area rose to 2.6% in May from 2.4% in April. Forward-looking data suggested a slowdown in the eurozone's economic recovery, with the flash HCOB composite purchasing managers' index dropping to 50.8 in June from 52.2 in May.
European parliamentary elections saw gains for right-wing nationalist parties, particularly in France, where President Macron called for parliamentary elections, surprising markets and causing French equities to underperform the broader eurozone index.
UK equities rose, with the FTSE 100 reaching new all-time highs. Small and mid-sized (SMID) companies performed well, bolstered by new bids and optimism for a potential turnaround for domestically-focused companies. However, towards the end of the quarter, SMIDs gave back some gains as markets adjusted their expectations for imminent interest rate cuts.
The Japanese equity market achieved a positive return of 1.7% in Japanese yen terms for TOPIX Total Return during the quarter. However, the continued depreciation of the yen turned the foreign currency-based return negative. Yen weakness was driven by the strong US dollar, supported by a robust US economy and the expectation of prolonged higher interest rates.
Chinese shares also posted strong gains, as low valuations enticed Asia-focused investors back to the market, despite concerns over India's high valuations and Japan's currency issues. Optimism for AI-related stocks boosted shares in Taiwan, making it the best-performing index market for the quarter and year-to-date.
Emerging European markets, including Hungary, the Czech Republic, and Poland, performed well. China's recovery in April and May, following a period of underperformance, also outpaced the broader emerging markets. Support for the housing sector and President Xi's reform rhetoric were beneficial.
The S&P GSCI Index recorded a modest gain in Q2. Industrial and precious metals were the strongest components, with zinc and silver prices rising sharply, while gold saw a more moderate increase. The energy sector achieved a modest gain, driven by a significant rise in natural gas prices. In agriculture, a notable price increase for coffee did not offset declines in cotton, corn, cocoa, and sugar.
This quarterly review highlights the diverse performance across global markets, with AI-related stocks and Asian markets standing out as significant contributors to emerging market gains.
