We share our latest observations on global asset markets in relation to T8 Energy Vision

All movements are expressed in United States (US) dollar terms, unless otherwise stated.

During July, inflation and labour market data demonstrated continued progress in the US Federal Reserve’s battle with inflation and resulted in improved risk appetite amid a continuation of the downward trend in US Treasury yields (yields on 10-year US Treasuries contracted 37 basis points to 4.03%). The impact was especially apparent at the front end of the curve (yields on 2-year US Treasuries contracted 50 basis points to 4.26%), indicating that the expectations for interest rate cuts in the near term is increasing. At the end of July, markets were pricing in an interest rate cut of 25 basis points by the end of 2024. The weakening US dollar (-1.7%) was coincident with an overall increase in risk appetite.

The biggest beneficiaries (and best performers) of the shift in interest rate expectations and increase in risk appetite were the segments of the equity market with the greatest sensitivity to interest rates. These include small caps (companies with market capitalisation of less than US$10 billion) as well as the utilities and real estate sectors.

US technology stocks moved in the opposite direction, having been the standout performers through the period of rising interest rates. The largest companies experienced most selling pressure with the exception of Tesla and Apple, which reported better than expected financial results and made announcements in relation to the launch of new products or services leveraging artificial intelligence (AI) technology. The latter may have had greater significance from the market’s perspective given the recent mania for everything AI.

Global equities rose (+1.7%), propelled by US value stocks (+5.0%) and European indices (especially the United Kingdom +2.5% and Germany +1.5%) and notwithstanding the weakness in large US technology growth stocks (NASDAQ 100 -1.6%) and all major Asian indices (Hong Kong -2.1%, Japan -1.2%, Korea -1.0% and China -1.0%).

Further to our earlier comments, at sector level within the US market, the highly interest rate sensitive real estate (+7.1%) and utilities (+6.7%) sectors were the strongest performers. Only the communication services (-4.2%) and information technology (-2.1%) sectors posted negative returns for the month.

Counterintuitively, the materials sector (+4.3%) and its sub-sector metals and mining (+3.1%) experienced a strong month notwithstanding continued weakness in the prices of industrial metals (copper -3.7%, aluminium -10.4% and nickel -4.1%). While it is likely explained by the shift in expectations for interest rate cuts, it emphasises a mismatch between the views of metals traders (shorter-term supply and demand fundamentals) relative to equity investors (longer term fundamentals). We believe this implies some downside risk for metals and mining stocks in the shorter term, especially in the event metals prices continue to weaken.

Analysis by factor further emphasised the preference for beneficiaries of interest rate cuts with value (+5.0%) outperforming growth (-1.7%) and small caps (+10.1%) gapping up, well ahead of large caps (+1.7%).

The Clean Energy Index (+5.9%) demonstrated its characteristic sensitivity to interest rates. While it moved directionally in line with small cap equities (the Clean Energy Index should be considered a sub-set of small caps on the basis that its median market capitalisation is US$2 billion), its move was less powerful which we attribute to lingering short-term uncertainty within the industry, especially in relation to the US presidential election and notwithstanding Democratic candidate Karmala Harris’ prospects improving according to opinion polls. The consensus view is that a Harris presidency would be positive for clean energy (on the basis that she comes from the state of California whose policies tend to lead the country and is on record as being slightly more pro-clean energy than even President Biden has been) whereas a re-election of Trump would be viewed negatively – we have published a research paper exploring the implications for clean energy in the event of a second Trump presidency.

Within clean energy, the electric vehicles (+21.2%) and wind (+12.9%) segments experienced outsized upward moves driven by some very large moves at stock level, including EVgo (+57%), ChargePoint (+44%), QuantumScape (+31%) and Rivian (+22%) within electric vehicles and Suzlon Energy (+31%) and Orsted (+12%) within wind. All other segments lagged the headline index performance (as well as the performance of small caps) which we attribute to the above-mentioned shorter-term policy uncertainty. Critical raw materials (-2.2%) was the only segment to detract from the performance of the index during the month.