Changing of the guard
Markets in Q3 staged a leadership change. Those infamous high-flying US tech stocks started to return negative performance, whilst the stocks of companies unrelated to US tech surged forward. These stocks, whose prices are at a much lower level than that of US tech, were seen as a good relative value investment in Q3. Predominantly, the step change which saw investors moving away from the Artificial Intelligence (AI) hype and into the stocks of real-world companies came off the back of the US cutting interest rates whilst economic growth remained stable, and inflation coming under control. This trifecta of factors helped to embolden investors. The positive effect of interest rate cuts without the fear of a recession was a reason to take on more risk in portfolios. This was to be found in high-quality companies outside of US tech and thus the much-anticipated rotation from growth stocks into value stocks occurred in Q3. Should economic growth remain robust in the US and other developed nations as expected, we see this trend continuing into Q4 to the benefit of active managers and clients invested into them.
 
 
Is China back?
Chinese equities have gone through a torrid period as their economy battles a slew of concerns such as slowing growth, continuing tensions with the US and low consumer confidence. This perfect storm had led the largest 300 Chinese stocks (CSI 300) to a dismal return of -30% since the start of 2022, in local currency. However, late September bore witness to an incredible 25% recovery in just one week of trading. The catalyst? A potentially epochal level of government stimulus, designed to pull the Chinese equity market out of the doldrums. So far so good, as investors flood back to a market buoyed by lower borrowing costs across the whole economy but also specific measures emboldening home buyers and mortgage payers. Beijing is now targeting a seemingly healthy 5% annual economic growth, however this still doesn’t live up to their previous feats, perhaps pointing to the long-term structural issues that China must overcome. Therefore, TAM is comfortable with our managed overweight to the Chinese market. Although initial signs are positive, the market has begun to pull back once again, showing the high levels of investor uncertainty in this market.
 
 
What will the US election mean for markets?
The US Presidential election is approaching, with a close race between Vice President Kamala Harris and former President Donald Trump, and neither side has a significant edge. Some investors are now speculating what a Democratic or Republican White House may mean for capital markets. Yet, history shows only a minimal long-term market impact from election results, especially as markets now appear to be focused on corporate earnings and Federal Reserve rhetoric. However, election outcomes will certainly have a meaningful effect on individual sectors, proposed policies, and global tensions. Both nominees have pledged some form of taxing cutting regime to attract voters, likely funded by imposed tariffs on Chinese goods. Something that may spur further tensions with China. Pursuing fiscal stimulus to boost the economy also appears inevitable from either candidate. And policy issues on healthcare and immigration, and spending priorities such as energy and infrastructure will also draw more investor attention as the election race heats up. The bottom line remains however, S&P 500 gains have historically been positive across most administrations and neither can claim superior performance.