Our latest monthly investment update for August 2024 examines how the global investment markets, economy, and commodities perform.
The FTSE 100 index of leading UK company shares closed at the end of July at 8,367.98, up 203.86 points or 2.5% during the month.
Long-awaited rate cut
The Bank of England lowered interest rates on Thursday from a 16-year high after a narrow vote among policymakers, who were divided on whether inflation pressures had sufficiently eased. This decision initially weakened the pound.
The rate cut aligned with predictions from a Reuters poll of economists, though financial markets had only priced in a little over a 60% probability of a reduction.
Governor Andrew Bailey, who led the 5-4 decision to reduce rates by a quarter-point to 5%, stated that the Monetary Policy Committee would proceed cautiously. “We need to make sure inflation stays low, and be careful not to cut interest rates too quickly or by too much,” he said.
House prices rise
UK house prices rose at their fastest annual rate since the end of 2022 last month, exceeding expectations as the Bank of England announced a cut in interest rates from their 16-year high.
According to Nationwide’s latest figures, prices increased by 2.1% year-on-year in July, with a monthly rise of 0.3%. Economists polled by Reuters had forecasted annual and monthly rises of 1.8% and 0.1%, respectively. This data suggests that lower borrowing costs might be stimulating a recovery in demand from homebuyers.
The BoE reduced interest rates by a quarter percentage point to 5%, marking the first reduction in over four years. Anticipation of this move had already led to a decrease in mortgage rates.
Estate agency Knight Frank described the rate cut as “transformative” for market sentiment.
Dividends return
Rolls-Royce announced it will resume its dividend payments after a four-year hiatus, forecasting increased profits. The company expects its full-year underlying operating profit for 2024 to be between £2.1 billion and £2.3 billion ($2.70–2.95 billion), up to £300 million more than its February prediction.
In October, the Derby-based firm, known for manufacturing engines for aircraft, ships, submarines, and power generation systems, announced it would cut 2,500 jobs from its global workforce of 42,000 to become a “more efficient and effective” company. Rolls-Royce has not paid a dividend since 2020.
Energy crisis over
The energy crisis in Europe is over, according to Shell’s chief executive, as market prices and volatility have returned to pre-invasion levels before Russia’s full-scale assault on Ukraine in February 2022.
“We have seen that across the energy complex this quarter, maybe more so than any of the previous ones in recent times, that we are moving back to a normalised price and margin level that is pre-2022,” said Wael Sawan in an interview with the Financial Times, noting the stabilisation of gas, crude, and power prices.
Despite these positive developments, Sawan, who became chief executive in January 2023, said he is preparing Shell for challenges during the energy transition.
Shell reported adjusted earnings of $6.3 billion in the second quarter, surpassing expectations and up from $5.1 billion a year earlier. The company announced cost savings of $1.7 billion and reduced net debt by over $2 billion. Sawan confirmed the continuation of both the dividend and Shell’s quarterly $3.5 billion share buyback programme.
Renewable energy hike
The government is planning to significantly increase the budget for this year’s renewable energy auction in response to industry demands for greater support.
Energy Secretary Ed Miliband announced on Wednesday that the budget would rise to £1.5 billion, an increase of £500 million from last year.
Most of the funding will be allocated to offshore wind power development, which the Labour government aims to quadruple by 2030.
While the renewables industry has broadly welcomed the additional funding, there are concerns that without further changes, new projects may not be delivered on time.
Growing sense of confidence
As U.S. rate cuts become more likely, investors face a new challenge: determining whether the Federal Reserve can ease monetary policy at a pace that achieves the desired economic “soft landing” that has boosted asset prices this year.
Fed Chairman Jerome Powell stated on Wednesday that “there was a growing sense of confidence” the central bank could cut rates in September if inflation continues to cool. This is the strongest indication yet that officials are preparing to ease monetary policy soon.
AI investment
Meta Platforms Inc. reported stronger-than-expected sales in the second quarter, indicating that the company’s investments in artificial intelligence are enhancing its ability to sell more targeted ads. As a result, shares rose in pre-market trading.
This progress gives Chief Executive Officer Mark Zuckerberg additional time to demonstrate the value of his investments in the metaverse and AI. During a call with investors and analysts on Wednesday, Zuckerberg discussed Meta’s advancements in large language models that power AI chatbots and highlighted the company’s AI-driven smart glasses and virtual reality headsets.
“There are all the jokes about how all the tech CEOs get on these earnings calls and just talk about AI the whole time,” he said. “It’s because it’s actually super exciting and it’s going to change all these different things over multiple time horizons.”
Irish sovereign wealth fund
Irish Finance Minister Jack Chambers has signed the commencement order to establish the country’s new sovereign wealth fund, which has the potential to grow to over €100 billion ($108 billion).
The aim is to channel one of Europe’s rare budget surpluses into a fund that can shield the economy from future downturns and expenses, including those related to an aging population and climate change.
Rising business confidence
Lloyds Bank’s latest Business Barometer revealed a significant rise in overall business confidence in July, matching the highest level seen in eight years. Business confidence increased by 9 points to 50% this month, reversing June’s decline and equalling May’s eight-year high.
July’s strong result was driven by an improved outlook for trading prospects and economic optimism. About 62% of businesses reported stronger activity, up from 53% in June, while only 6% anticipated weaker trading prospects, down from 9%. This resulted in a net balance increase of 12 points to 56%, a level for trading prospects not seen since April 2017.
Economic optimism also rebounded, with 62% of respondents, up from 55% in June, feeling more positive about the economy, while 17%, up from 16%, felt more negative.
Oil prices fall
Oil prices fell by about 1% to a seven-week low at the end of July as investors grew concerned about weakening demand from China, while OPEC+ is expected to maintain plans to increase supply.
For several days, market participants have discussed a potential ceasefire deal in Gaza, which could lower the geopolitical risk premium affecting crude prices.
Brent futures dropped $1.15, or 1.4%, settling at $78.63, while U.S. West Texas Intermediate (WTI) crude decreased by $1.08, or 1.4%, to $74.73.
Market Data
£1 buys $1.2810 or €1.1864. Gold is $2,426.30 an ounce, and UK natural gas futures are 89.75p/therm, up from 78.68p/therm at the start of July. The UK 10-year gilt yield is 3.910%, down from 4.261% at the start of July.
