LD Discretionary, the largest investment fund within The Cost-of-Living Allowance Fund, has generated a positive return of 3.9% in the first half of 2024. The return on the employees' holiday allowance fund stood at 5.9% as at 30 June. Following a strong first quarter, the second quarter of 2024 has been slightly more subdued. The market in the first half of the year was driven by three overarching themes – global growth, high concentration in the equity market and political uncertainty.
Focus on strong stock markets and global growth
At the start of the year, the equity markets posted solid gains, building on the strong returns seen in the final months of 2023. Global equities, as measured by the MSCI World Index, have delivered a return of 15.0% year-to-date in Danish kroner. Danish equities, as represented by the leading OMXC25 index, have recorded a return of 8.3% in the first half of 2024.
Growth in the US economy is slowing but remains robust, whilst the European economy appears to be experiencing a moderate recovery following a period of low growth. Inflation in the major economies continues its downward trend, although core inflation remains above the central banks’ targets.
Overall, this means that central banks will likely be able to ease monetary policy during 2024. This creates a relatively favourable macroeconomic environment with positive economic growth without the risk of overheating, whilst inflationary pressures ease, providing a sound basis for financial stability and a moderate rise in asset prices in 2024.
High risk of concentration in the stock market
The six largest shares in the S&P 500 index have accounted for over 70 per cent of the index’s value growth in 2024. Nvidia shares, in particular, have risen to become the world’s most valuable share, driven by strong demand for and expectations regarding artificial intelligence-related companies.
The six largest shares in the S&P 500 index now account for over 30 per cent of the market capitalisation. This high concentration in a small number of shares is historically unusual and means that any correction in these shares would have major negative consequences for the stock market as a whole. This high concentration also makes it difficult for investors to ensure both a broad diversification of risk across geographies, sectors and companies and low deviations from the global equity index.
Political risk
Political uncertainty is generally on the rise and has had a noticeable impact on the financial markets. A recent example is the turmoil caused by the calling of the French parliamentary election, which has led to widening yield spreads against German government bonds and falling French share prices.
In addition, a general election is due to be held in the UK on 4 July, in which Labour looks set to secure a resounding victory. However, the US presidential election in November is the event causing the greatest unease in the financial markets, as the outcome could have significant implications for economic policy and, consequently, market trends.
Like all other investors, we in LD Pensions are closely monitoring political developments and their potential impact on the financial markets in the second half of 2024.
