September: Markets Steady Amid Middle East Tensions and Rate Cuts

There is certainly a lot for the markets to digest at the moment.

• Despite volatility at the start of the month, equity markets ultimately finished the month higher and are up nearly 18% year-to-date for Euro-based investors.
• The conflict in the Middle East has intensified, expanding from Gaza to involve Lebanon and Iran. Israel’s initial successes against Hezbollah in Lebanon have seemingly emboldened their position and prompted a response from Iran, raising the risk of a broader and more serious regional conflict.
• With just over 30 days until the U.S. Presidential election, Trump and Harris remain in a tight race. The developments in the Middle East may favour Trump, as Harris is part of the current administration, which has struggled to deter Israel’s actions.
• The Federal Reserve cut its interest rate by 0.5%, while the ECB implemented its second 0.25% reduction.
• Chinese authorities have finally stepped in to stimulate their weakening economy.
• The OECD provided a cautiously optimistic outlook for global growth.
• Mario Draghi released a compelling report urging Europe to take decisive action to avoid falling further behind the U.S. and China in competitiveness.
• Ireland received a €14 billion windfall from the Apple case, adding to its ongoing budget surplus. This set the stage for what the media are calling a “giveaway” budget, announced by the Irish government on October 1st.

September and YTD Market Numbers

Equity Market Volatility Continues

Equity markets continue to experience volatility. Although they declined at the start of the month, they ultimately ended higher, with the MSCI ACWI index up nearly 18% for Euro-based investors over the first nine months of 2024.

Source: MSCI, ACWI Euro investor. Index rebased to 100 as at 31.12.23 Performance from 31.12.23 to 1.10.24

Inflation In EU Dips Below The 2% Target

In September, headline inflation in the EU stood at 1.8%, falling just below the stated 2% target. The Fed’s recent rate cut indicates growing confidence in achieving its own 2% target. However, the recent flare-up in the Middle East serves as a reminder that significant risks persist, which could potentially disrupt progress toward maintaining the 2% goal on a sustainable basis.

Source: Trading Economics

OECD Economic Outlook – Cautiously Optimistic

The latest economic outlook report from the OECD was published in September. The report titled “Turning the Corner” says global economic growth has been resilient, and inflation is continuing to moderate. Global growth is expected to stabilise at 3.2% in both 2024 and 2025, with further disinflation, improving real incomes, and less restrictive monetary policies supporting demand. Inflation in most G20 countries is projected to return to target levels by the end of 2025. However, the report also indicates that there are significant risks, including geopolitical tensions, a potential slowdown in growth as labour market pressures fade, and possible disruptions in financial markets if the expected disinflation path is not achieved.

Source: OECD September 2024 Report. Real GDP %.

Draghi Report

The EU published a report titled “The Future of European Competitiveness: A Competitiveness Strategy for Europe” during September. The report outlines the challenges and strategic directions for improving Europe’s economic performance and sustainability.

The work was led by Mario Draghi an Italian economist and former President of the European Central Bank (2011–2019), known for his role in stabilising the Eurozone during the debt crisis.

The report is hard hitting and argues that Europe risks falling further behind the United States and China if it does not take decisive action to overcome its fragmented policies and regulatory inconsistencies. The report highlights three main areas of action to reignite sustainable growth:

1. Closing the innovation gap: Emphasises that Europe must refocus on creating a competitive technology ecosystem, where new firms can scale rapidly, and high-quality research translates into commercial success. For example, establishing technology hubs would support Europe’s position in emerging tech fields such as AI and quantum computing.
2. Leading in sustainable decarbonization: The report states that a comprehensive joint plan for green energy is essential, targeting strategic areas like hydrogen and battery technology to reduce costs and improve energy security while maintaining leadership in clean technologies.
3. Enhancing security and strategic autonomy: Europe is highly dependent on non-EU countries for critical raw materials and advanced technologies. The establishment of a European Critical Raw Materials Act would help secure supply chains, build strategic reserves, and foster partnerships to reduce vulnerabilities.

The report includes 72 specific recommendations. While it would be ideal to see many of these reviewed and implemented, the EU has a history of slow progress, typically acting decisively only when confronted by a major crisis.

Budget 2025

The government entered this year’s budget planning with an anticipated surplus of €24 billion for 2024, including approximately €14 billion in one-off funds related to the Apple case. Against this financial backdrop, and with an election looming in the coming months, the government announced a €10.5 billion package centred on cost-of-living supports, climate action, and housing initiatives. Key measures include tax reductions, an increase in the national minimum wage to €13.50 per hour, and extended housing reliefs.

Key Changes for Long-term Investors and Business Owners

1. Inheritance and Gift Tax Thresholds:
   • Group A (Parent/Child): Increased to €400,000.
   • Group B (Certain Relatives): Increased to €40,000.
   • Group C (Others): Increased to €20,000.
2. Pensions: The Standard Fund Threshold (SFT) will rise from €2 million to €2.8 million by 2029, with the increase taking place incrementally—€200,000 per year starting in 2026. From 2030, the SFT will adjust annually in line with the average industrial wage. No changes were made to PRSAs, though additional updates may be included in the upcoming Finance Bill.
3. Employment Investment Incentive Scheme (EII): The scheme has been extended until the end of 2026, and the permitted investment amount has been doubled to €1 million.
4. Employee Small Benefit Exemption: The annual exemption has been increased from €1,000 to €1,500 per employee.
5. Stamp Duty on High-Value Residential Properties: A new 6% stamp duty rate will apply to the portion of residential property prices exceeding €1.5 million. Current rates of 1% apply to the first €1 million and 2% to the next €500,000.

Our Investment Outlook

Equity returns have been stronger than expected so far this year. As a result, for investors considering additional equity allocations, we are currently advocating for patience.

Holding cash remains a comfortable position, with returns still exceeding 3% annually. This strategy allows us to remain flexible while watching for favourable entry points in the market.

Recent fluctuations highlight the importance of having a well-structured plan and staying committed to long-term objectives. We continue to believe that patience, discipline, and a measured approach are essential components of successful investing. By collaborating closely with your advisor and maintaining a solid plan, you can navigate these market shifts with confidence and be well-positioned to capitalise on emerging opportunities.

John Tuohy is Chief Executive of Acuvest, an Irish-owned, independent advisory firm specialising in wealth management, pensions, and investment advisory services for individuals, companies, pension schemes, charities, and institutions. John is a Chartered Financial Analyst (CFA) and a Fellow of the Chartered Association of Certified Accountants.