October MPS Update

Market Update

Central bank activity dominated market sentiment during the third quarter, overshadowing an eventful political backdrop that included a resounding Labour victory, a late change in the Democratic Presidential nominee and the disturbing scenes involving two assassination attempts on former President and Republican nominee Donald Trump.

The Bank of England and Federal Reserve both announced their first interest rate cuts in over four years, with the Fed lowering the target rate by 50 basis point move at its September meeting, following the decision not to cut in July. Markets reacted positively, hitting new highs despite bouts of turbulence during the period, most notably in early August following weaker US jobs data. However positive company earnings and the subsequent Fed action steadied the ship, leading to a strong close. Emerging markets also surged late in the quarter following the announcement of a major stimulus package by Chinese authorities.

Interestingly, the quarter also saw a reversal of several trends from earlier in 2024, with small-cap companies outperforming larger tech stocks and more lowly-valued segments of the market – such as utilities and property – gaining ground. Bonds also saw pleasing returns after a tough first half of the year, driven principally by rate cut expectations.

Strategy Performance

The MPS strategies delivered positive returns over September, with most up modestly over the quarter as a whole, thereby extending the returns achieved so far in 2024.

• For sterling-based investors the scale of these gains was significantly reduced by currency movements, with the pound rallying almost 6% against the US dollar to trade at its highest level since early 2022. This left returns from US equities broadly flat for the period in sterling terms, despite the US market rising by roughly 6%, with gains from other international markets similarly eroded.
• Despite this headwind, it was pleasing to see solid gains across the lower-risk strategies. Returns of between 2-2.5% from the fixed interest exposure certainly helped, while we also saw positive contributions from the commercial property, listed infrastructure and private equity holdings, which responded well to a series of positive corporate updates and the beginning of this new rate cutting environment.
• Relative performance across the strategies’ equity allocations proved mixed, with the UK and North American equity allocations enduring a more challenging period after a strong second quarter. In contrast, the European equity and Japanese equity fared better.

Activity

We introduced several new ideas to the strategies in September.

• Within the UK equity allocation we established a position in Bytes Technology Group. Bytes is what is known as a value-added reseller (VAR) in the software and computer services sector. This channel is a longstanding and valuable route to market for large technology companies seeking to sell to small and midsize enterprises. Historically, we have not owned VAR investments because of their high exposure to low growth IT hardware such as PC’s, printers and networking equipment However, Bytes’ differentiation is that circa 90% of the company’s gross profits are derived from software products, with around 50% of this figure coming from Microsoft. Bytes is also a key partner to other large global vendors, with Amazon Web Services, Adobe and several cyber security-orientated companies amongst their key relationships. We therefore see Bytes as an attractive, UK-listed way of obtaining inexpensive exposure to our preferred IT growth themes of cloud, generative AI and cybersecurity. The purchase of this stock was partially funded through the sale of our holding in Darktrace, the UK-based cybersecurity holding which was bid for by private equity firm Thomas Bravo, and which has now de-listed following regulatory approval of the takeover
• Finally, across the strategies’ alternative investments holdings we exited the position in the PIMCO Dynamic Multi-Asset fund in favour of BNY Real Return. This followed the announcement of forthcoming changes to the former’s strategy. We also added Impact Healthcare REIT, a property company owning but not operating care homes across the UK. With long leases and a strong focus on affordability for operating tenants, Impact Healthcare REIT’s business model is well supported by the UK’s tight supply of care home beds and its ageing population. With the stock trading on an attractive valuation and yield, and with recent data indicating rising net asset values for property firms, we deemed this an opportune moment to invest.

Outlook

Corporate earnings also continue to grow across most sectors and regions, underpinning our positive outlook for equities. While there has been a notable softening in some economic data points, such as US employment data, the overall picture remains fairly robust, with the UK, US and Eurozone’s central banks all now in interest rate cutting cycles. We still believe a “soft-landing” scenario — whereby leading economies avoid deep recessions — remains the most likely outcome, but remain vigilant, closely monitoring developments and ready to adjust our view should the fundamentals tell us otherwise.

Stock markets remain on track for another good year, despite the summer bout of volatility, with global and North American equity indices comfortably into double-digit gains, and the UK not far behind. Bond markets have also recently been boosted by central bank activity and inflation falling back closer to target. We continue to remain constructive on the overall backdrop for bonds, as reflected in our long-standing overweight position, one which we further increased over the quarter. To conclude, there is no change to our combined tactical tilt in favour of equities and bonds at the expense of cash and alternative investments. At the same time, we continue to see – and take advantage of – selective opportunities emerging across the latter.

You can find out more about our MPS strategies, and how we executed them this October, on our YouTube channel.