SPW MarketWatch: June 2024

Source: FactSet, 1 July 2024. Figures are monthly price returns in local currencies for June 2024.

Modi wins Indian election with reduced majority

Narendra Modi, head of India’s Hindu nationalist Bharatiya Janata Party (BJP), won a record third term as the country’s prime minister. Modi had forecast a two-thirds majority but a shock election result left the BJP without an outright majority and having to rely on coalition partners.

The Indian stock market rose strongly in anticipation of a robust BJP victory only to decline firmly as the results came out. It has subsequently recovered.

India’s economy grew strongly after the Covid-19 pandemic and Modi aims for India to become the world’s third-largest economy during his third term. It is currently fifth largest.

India has had considerable economic success in the past decade, with improving infrastructure such as highways and airports. In our view, the outlook for India remains positive and we continue to expect strong Indian economic growth in the next couple of years.

Even so, we have a neutral stance on Asian emerging market equities (which excludes China) as we do for global emerging market equities (shares). But we retain our positive view on equities as a whole.

Farage enters the fray

On 3 June arch Brexiteer and former Ukip party leader Nigel Farage entered the UK election race as head of Reform UK. This poses an additional challenge to Rishi Sunak’s Conservative Party, which has long trailed the Labour Party in opinion polls. That’s because Farage’s right-wing party is more likely to take votes from the Tories than from Labour.

Indeed former Conservative cabinet minister Sir Jacob Rees-Mogg has supported the idea of a tie-up between the two parties. But this viewpoint has not been voiced by the prime minister himself or by Farage.

Farage’s move came as a surprise, as he had previously planned to help Donald Trump’s US presidential election campaign. His change of mind increases the chances of Labour winning by a large majority.

We note that UK inflation has fallen to 2 percent, the target rate set for the Bank of England. Against this backdrop we expect to see UK interest rate falls amounting to one percentage point in the next year or so. And interest rate falls can often support equities. Even so, we have downgraded our stance on UK equities to neutral as we see greater opportunities elsewhere.

ECB cuts rates for first time in nearly five years

The European Central Bank (ECB) cut its base interest rate by 0.25 percentage points to 3.75 percent on 6 June. This puts it ahead of the US and UK central banks, which are yet to reduce interest rates from recent high levels.

ECB president Christine Lagarde said there was a ‘strong likelihood’ the cut would mark the start of ‘dialling back’ interest rates from their record high. Even so, she said any further cuts would ‘depend on the data that we receive’.

The immediate impact on bond prices was slight, as the yields on two-year German government bonds rose by just 0.03 percentage points on the day, to reach 3 percent (bond yields rise when bond prices fall). Crucially, these bonds have a high sensitivity to interest rate changes and are a bond benchmark for the Eurozone.

Bond prices often rise when interest rates fall. But we note that Eurozone inflation rose in May, which means the ECB may decide to slow the pace at which it makes further cuts. Against this backdrop we have a neutral stance on German government bonds, as we do with government bonds in general.