Catella APAM - Investment Market Commentary - Q2 2024
"The market is the story of cycles and of the human behaviour responsible for overreactions in both directions." Ken Fisher
For once, a political result we all saw coming. Following the Brexit surprise, Trump shock in 2016, Conservative leadership ‘ping pong’ of the last few years and the consequential volatility that came with those outcomes, it is a good omen that the most predictable election result played out just as everyone expected. Britain needs steady and predictable, and on early indications, this government will be just that.
The UK economy has built momentum over the quarter with GDP forecasts continuously revised upwards. Barclays and Goldman now predict growth of 1.2% for 2024, outperforming all Western European economies. Inflation has declined enough for the BoE to begin the cutting cycle at 25bps in August, boosting real earnings power and solidifying the momentum established over the first six months.
Recommended by LinkedIn
Politically, Q2 has been a very busy quarter, with elections in France and India and the run-up in the US. In contrast to the UK, the outcome of all these elections is likely to increase volatility. In France, a shock comeback from the far left will drag France in a different direction than previously thought, but with a fairly even split between right, middle and left, there is unlikely to be any consensus. India is now in a coalition after Modi’s brand took a knock, and most impactfully, political violence in the US has once again hit the headlines. The failed assassination attempt on Donald Trump will galvanise his support while the Democrats have spent most of the quarter lost in action from a strategic perspective. For the first time in a number of years, when compared to its peers, the UK looks surprisingly stable and a potential safe haven. When you add in historically low asset prices, it is plausible that the UK could attract significant inward investment over the coming years.
As the political cycle begins anew, we see the real estate markets following suit. Confidence in the UK markets is beginning to pick up as we move past peak pessimism towards cautious optimism. Making that leap does require brave decision making as the herd is still cautious. Investors must overcome their behavioural bias and take on the risk they are being paid to manage. Caution remains in the office market, with optimism so far restricted to sector specialists. As we outlined in our last report, residential markets continue to gain momentum with transaction volumes increasing across the living sectors. Confidence is also returning in the logistics sector, now the asset class has re-priced.
We continue to view the real estate investment market through the lens of cyclicality, attempting to identify the underlying drivers of growth while being conscious of where we are in the cycle. We believe many real estate sectors are entering a new cycle and we’re alert to the behavioural bias acting against investors’ best interests. Those able to shake off the shackles of pessimism and embrace the early shoots of optimism should be rewarded by the outperformance of early cycle dynamics. As Ken Fisher insinuates, markets will continue to offer opportunity as long as they are driven by human behaviour. The art is in embracing those contrarian moments.