Patience is a must

Many of us tend to be hyperactive, a behavioural trait that has become noticeably worse with the rise of social media. We feel like we are missing out if we do nothing, especially when it comes to our portfolios and financial markets. The problem is particularly acute among asset management professionals. Many undoubtedly feel guilty if they do nothing. But we are precisely at a point where we feel there is no obvious opportunity in our asset allocations.

Let us summarise the reasons for this, while making it clear that our point of view is based on the fundamental principle that a portfolio is invested by default. In other words, the fallback position, in the absence of a strong reason to the contrary, is to normalise one’s risk budget close to one’s strategic allocation rather than taking refuge in risk-free assets. Remember that cash is a tactical asset, not a strategic one. This is exactly where we are now, and it has served us rather well in the first half of 2024.

As we enter the second half of 2024, patience is the order of the day. We remain invested, while leaving ourselves some room to manoeuvre should the markets experience a spike in volatility in the months ahead.

The economy is returning to normal

The latest US employment figures confirm the image of an economy that is returning to normal after the external shocks of the pandemic and the war in Ukraine that marked the start of the decade. The debate over the next move in key rates in Washington and Frankfurt rages on.

For our part, we make the following observations:

• Firstly, an economy with normalised interest rates of 5% and 4% respectively can continue to grow without any problems.
• Secondly, we are sceptical of the notion that the US Federal Reserve (Fed) is in very restrictive territory when US stock market indices and the price of gold are at all-time highs.
• Thirdly, the G7 central banks have managed to extricate themselves from zero or even negative interest rates, and under no circumstances do they wish to return to them.

Central bankers rightly consider it much healthier for capital to once again have a price or cost (depending on whether you lend or borrow). As a result of the above, we believe that the adjustment of investors’ expectations regarding possible key rate cuts is part of the general move towards the normalisation of developed economies and risky asset prices on the markets. In the US, further disinflation towards 2% is indeed proving laborious, but that is already reflected in our Secular Outlook, which includes a new normal price inflation of 3% rather than 2% on average this decade, mainly due to structural changes in Western labour markets as the baby- boom generation hits retirement age.

US public and private balance sheets diverge

While the economy is normalising, an examination of private and public US balance sheets nevertheless reveal a structural divergence. On the household side, the involuntary savings accumulated during the pandemic have been spent, but personal balance sheets remain solid in aggregate. Although the modest-income segments in the US are showing some signs of stress, they are still benefiting from a favourable labour market, including in terms of wage growth. The corporate sector is experiencing varying fortunes depending on the industries and segments concerned, but here too the situation is healthy overall, particularly for the large, listed companies that populate the S&P 500 Index. They have benefited from rising interest rates, a phenomenon unprecedented in a monetary tightening cycle. The situation is diametrically different in the public sector, where deficits are piling up, debt continues to grow, and, above all, the cost of debt-servicing is sky rocketing as interest rates normalise. Stress is therefore mounting on public balance sheets, while the private sector remains healthy and serene.

Politics and geopolitics are the main source of uncertainty

In the relatively benign private sector context summarised above, politics and geopolitics remain the major disruptive factors. We will refrain here from rehearsing once again the details of the current multipolar geopolitical context. There is an expected structural increase in demand for the gold from investors outside the G7 who are looking for assets that diversify and protect against possible Western sanctions. On the domestic front, the results of the elections in India and in the European Parliament were well absorbed initially, but are contributing to increased uncertainty in the medium term. The shift towards the far right in Europe is likely to be a major turning point on the Old Continent, where ageing populations affected by the inflation shock of the early part of the decade are turning away from traditional centrist political parties in search of an alternative path. In the US, if Donald Trump loses the presidential election in November, the risk of contestation and unrest is considerable. Should he win the election, his economic policies, including a cocktail of possible tax cuts and import tariff hikes, could destabilise a US Treasury bond market already weakened by rising interest rates and their impact on debt-servicing.