Should investors worry about the remainder of 2024?

As they enter the last quarter, those with long memories of past October shocks may wonder whether they should lock in gains. This year brings the additional uncertainties of a UK budget and the US presidential election, combined with increasing hostilities in the Middle East and Ukraine.

Furthermore, global growth prospects face a challenge from the current weakness in the Chinese and European economies. And although it has not so far been a banner year for stock markets, many investors have seen positive share performances that beat cash returns.

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For the year to date the UK stock market has begun to return to favour, after a post-Brexit period in which it significantly lagged its peers internationally. Before a rally began 12 months ago, smaller and medium-sized companies listed in London had fallen to long-term low valuations relative to the largest global business.

The sellers of British shares were not just international investors but UK wealth managers concerned about political turmoil, a weak pound and a dull domestic economy. These worries seemed to self-perpetuate, with many pessimistic about the future of the London market, thinking performance would only come from the US technology giants.

Much has changed in 2024. The UK economy remains dull but few economies are keeping pace with the US, which has been boosted by borrowing that may not prove sustainable.

The pound has recovered 20% from the lows of the Truss Budget two years ago, and this month also reached its highest level versus the euro since April 2022.

For smaller and medium-sized British companies it looks like stability is returning, with attractive valuations beginning to be recognised. Takeovers in the London market suggest that share valuations of many businesses had fallen below underlying commercial value. These bids and mergers are spread across a wide range of sectors.

This broadening of stock market performance after a time when all the attention was on big companies is also a feature of the US and other markets. Investors seem to be looking for opportunity for growth in out-of-favour areas.

Despite the challenges for the global economy there is still value in neglected shares and potential for more catch up from small and medium-sized businesses. And there is stimulation still to be felt from the recent US interest rate cut and a bold stimulus package in China. Some cost pressures, such as the oil price, are easing.

The UK Budget in October may encourage some portfolio repositioning and selling in fear of tax changes. But the Chancellor seems to recognise the need for stability in the London stock market, and the Budget brings potential for new growth initiatives and stimulus.

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Investors should focus on value in shares and government bonds, and recognise that lower bank deposit rates make holding cash less attractive. In global terms, the UK is a less important stock market now and investors did need to rebalance exposure. But that move looked overdone last year and there is still more scope for the pendulum to swing back.

This year investors have favoured businesses seen as "quality", with strong balance sheets and less debt risk – a pattern that may persist. International tensions and elections are ever present – investors need to match their overall portfolios, including cash and bonds, to their tolerance of risk.

Reacting to immediate fears often undermines long-term performance. It is better to focus on the strength of management and the record of resilience in a business: companies themselves are strongly incentivised to address risks and adapt.

Going into the fourth quarter, the global economy is getting some help from central banks and government stimulus. The UK shares in this opportunity, and may even end this year looking like a relatively safe haven with a strengthening currency.

Colin McLean is a director of SVM Asset Management Holdings