Monthly update: Markets keep their cool amid election uncertainty

WHAT’S HAPPENING IN FINANCIAL MARKETS?

It was another reassuring month for global markets despite European elections causing some uncertainty. Strong company earnings, cooling inflation and hopes of central bank interest rate cuts all helped drive global equities higher.

With inflation easing worldwide, major central banks are starting to diverge from the US Federal Reserve (Fed). Investors initially expected the Fed to be the first to cut rates, but with US inflation proving stickier than expected, others decided not to wait.

The European Central Bank (ECB) cut rates for the first time in five years, citing progress in fighting inflation, while Canada's central bank also cut its benchmark rate.

The ECB has been able to cut interest rates before the US because Europe’s economy is cooling faster. But due to varying inflation and wage pressures across the continent, the ECB could be more reserved in lowering rates than investors expected at the start of the year.

European stocks and bonds dipped towards the end of the period after French President Emmanuel Macron called a surprise snap election. This followed a surge in support for the far right in the 2024 European Parliament elections. But stocks rebounded sharply as the first round of voting left Marine Le Pen's National Rally party looking unlikely to achieve a majority.

Lilian Chovin, Head of Asset Allocation, Coutts, said: “It has been business as usual for markets, although there has been some short-term volatility caused by elections.

“While elections can influence a country's economic direction, they don't have much medium or long-term effect on stock markets. Broader global economic trends and company earnings are much more important long-term factors for investors.”

Turning to the economy, he added: “Central banks are now entering a rate-cutting cycle, but inflation risks and diverse economic conditions suggest we’re unlikely to see aggressive cuts for the time being.”

WHAT DOES THIS MEAN FOR YOUR INVESTMENTS?

The current climate favours stock markets but poses challenges for bonds, which feel the impact of changing interest rate cut expectations more immediately. In anticipation of these conditions, our positioning has shown a preference for stocks over bonds since last October.  

Within our fixed income holdings, our investment in high-yield corporate bonds has continued to support our performance. Such bonds tend to do well when the economy grows.

We've also diversified our holdings further by adding gold last year, and more recently introducing a liquid alternatives fund to our more defensive mandates. This fund focuses on areas with low sensitivity to traditional stock and bond markets, and aims to generate stable returns regardless of whether those markets rise or fall.

The value of investments, and the income from them, can fall as well as rise and you may not get back what you put in. Past performance should not be taken as a guide to future performance. You should continue to hold cash for your short-term needs.

THIS MONTH’S SPOTLIGHT: How do elections affect markets?

This year is a big one for elections, with more than 60 countries going to the polls. We have already seen elections in the UK, France and India, while the race for the US Presidency is also heating up.

The lead-up to this year’s UK general election had minimal impact on markets, and they remained steady following Labour’s victory because it was widely anticipated. You can learn more about our insights on the UK election here.

Meanwhile, European markets dipped following Macron’s decision to call a snap election and a surge in support for the National Rally party. The resulting hung parliament means it will be difficult to pass any policy changes. But while there was some short-term volatility, this election is unlikely to cause any long-lasting concerns for investors in our view.

Coutts clients can find out more about our investment approach by speaking to their private banker.