LD Discretionary, the largest investment fund within The Cost-of-Living Allowance Fund, has delivered a positive return of 7.4% year-to-date in 2024. Over the last 36 months, the return stands at 11.8%. The return on the employees' holiday allowance stands at 8.9% as at 1 October, and since inception the return has been 15.5%. The third quarter of 2024 has been characterised by positive returns across all main asset classes – high-grade bonds, credit and equities.
Focus on falling interest rates
The equity markets have delivered positive returns throughout the year, but have also seen significant volatility. Global equities, as measured by the MSCI World Index, have delivered a return of 17.8% year-to-date in Danish kroner. Danish equities, represented by the leading OMXC25 index, have returned just over 7.1 per cent. In contrast to the first half of 2024, when just six or seven large US companies accounted for the value growth, third-quarter returns have been spread across smaller companies.
The main reason for the continued rise in the stock markets is that the US economy remains strong. The services sector, in particular, is helping to sustain growth, which is positive as this sector accounts for the majority of economic activity in the US. By contrast, the manufacturing sector is showing a somewhat lower level of activity, and the leading indicators for the sector have fallen significantly. Furthermore, there are early signs of weakness in the labour market. Unemployment had been at a historically low level but has now begun to rise at a rate that typically signals a recession. Core inflation in both Europe and the US remains above the central banks’ targets, though it is showing downward trends. This was also the aim of the sharp interest rate rises in 2022 and 2023.
In the third quarter, both the US Federal Reserve (Fed) and the European Central Bank (ECB) decided to cut interest rates in response to a slowdown in the labour market and falling inflation. The assessment was that it was necessary to ease the pressure in order to support economic growth. The result was a 0.5% cut by the Fed, whilst the ECB cut rates by only 0.25% in September, having already cut them by 0.25% in June. The yield on 10-year US government bonds fell from 4.4% to 3.7% in the third quarter, whilst German 10-year government bonds fell from 2.6% to 2.1% over the same period. The German economy, in particular, is a cause for concern. The manufacturing sector is struggling, which is why the European Central Bank is expected to announce further interest rate cuts soon.
China’s economy has also long been a cause for concern. At the end of September, significant monetary easing and fiscal measures were announced in an effort to halt the economic slowdown. This led to sharp rises in the Chinese stock markets.
Political risk
The geopolitical uncertainty is also worth noting. The conflict between Israel and its neighbours, Palestine and Lebanon, as well as Russia’s ongoing war with Ukraine, could lead to significant fluctuations in oil and energy prices should the conflicts escalate. Furthermore, the upcoming US presidential election is creating further uncertainty.
In their risk assessments, the financial markets must balance monetary policy easing, continued strong activity in the services sector and growth in the US against emerging signs of weakness in the labour market, a slowdown in the manufacturing sectors and geopolitical uncertainty. It is still difficult to assess whether the economy is heading for a ‘soft landing’ or a ‘hard landing’, which is why it may be wise to adopt a neutral stance at this stage.
