Markets wobble but bounce back

Global markets stumbled at the start of August due to US recession fears, following reports of a weaker jobs market and rise in the unemployment rate. But they soon recovered after data showed inflation is cooling and retail spending is strong. The Federal Reserve helped to restore confidence by suggesting rate cuts are on the way.

The UK economy is growing again

Although inflation remains just above its 2% target, the Bank of England has reduced interest rates from 5.25% to 5%, marking the first cut since March 2020. Meanwhile the economy has continued to recover from last year's recession, growing by 0.6% in the three months to June, following a 0.7% rise in the first quarter.

Europe is recovering but risks remain

The euro area economy seems to be improving after narrowly avoiding a recession in late 2023 - GDP expanded by 0.3% in the second quarter. The two main risks to the recovery are inflation, which has unexpectedly risen to 2.6%, and a relatively high level of unemployment. Yet rate cuts later in the year remain likely.

Relative performance

Large caps outperformed small caps, helped by a broadening of earnings growth outside the technology sector. Corporate bonds outperformed government bonds with the market pricing in a series of central bank rate cuts and forecasting a stable company earnings outlook. Meanwhile emerging markets outperformed developed markets.

Tactical asset allocation

Rate cuts should pave the way for out-of-favour asset classes to come back into vogue, including value, small cap and foreign debt. Investors are already tilting their portfolios to these areas. Our diversified portfolios hold all these asset classes, and we'll continue to make tactical decisions to capture opportunities we identify.

We remain cautiously positioned

We have an overweight allocation to bonds and slight underweight in equities. Although stock markets have rallied, a weaker economy could put pressure on company revenues. Our central case remains falling inflation, a peak in the interest rate cycle and a soft landing, but with a larger than normal risk of a deeper recession.

Issued by Omnis Investments, which is authorised and regulated by the Financial Conduct Authority. Registered address: Auckland House, Lydiard Fields, Swindon SN5 8UB. This update reflects our view at the time of writing and is subject to change. The document is for informational purposes only and is not investment advice. We recommend you discuss any investment decisions with your financial adviser. Omnis Investments is unable to provide investment advice. Every effort is made to ensure the accuracy of the information but no assurance or warranties are given. Past performance should not be considered as a guide to future performance. Approved by Omnis investments on 3 September 2024

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