What’s the story?
Against the backdrop of an improving economic outlook, regional divergences are building up in terms of economic momentum, inflation dynamics, and monetary policy, which create compelling opportunities across asset classes.
Equities should continue to be supported by favourable macroeconomic trends and earnings growth. The fertile investment environment should make any correction temporary and creates opportunities to deploy capital. Fixed income investors need to be more agile and tactical and should consider focusing on quality corporate bonds.
Global recovery continues
Year to date, the global economy has seen the emergence of diverging trends, mostly on a regional basis, with strong growth in the US and slightly contractionary growth elsewhere in developed markets. For the rest of 2024 and going into 2025, we expect to see the nascent global recovery strengthening further, driven by still robust growth in the US, China’s industrial response to its property market malaise, and the turnaround in the global information technology and goods cycles.
We expect the global recovery to be particularly beneficial for export-oriented European and Asian economies, China’s above all. With the overall macroeconomic and market environment likely remaining positive, we stay invested and believe that any market correction will be temporary and create opportunities across asset classes.
Disinflation across regions
The divergence in economic activity worldwide has affected inflation paths differently across regions. In the US, the disinflation process has proved to be bumpier than expected. However, it is underway and it is set to continue, even if at a slower pace than in the eurozone. Central banks, which tightened monetary policy in unison to curb the inflationary spike during the Covid-19 pandemic, will likely follow different paths when cutting interest rates. The US Federal Reserve faces a tough decision on the appropriate timing of the first rate cuts given the limited impact of monetary tightening so far and the uncertainty about the future trajectory of the disinflation process.
We expect a first rate cut in the US before the end of this year. In the eurozone, on the other hand, the disinflation process is well advanced and justifies the earlier start to the European Central Bank’s rate-cutting cycle.
Currencies: USD to remain rangebound in 2024
Higher-for-longer interest rates in the US should make any USD weakness temporary until the US elections, despite the cyclical upswing in the global economy. Higher yields, later interest rate cuts, and the cyclical superiority of the US economy argue in favour of the USD for now. Additionally, elevated geopolitical risks are likely to inject volatility into financial markets intermittently, benefiting safe-haven currencies such as the USD and the CHF. This is bound to make it difficult for cyclical currencies, such as the EUR and the AUD, to appreciate sustainably before the run-up to the highly uncertain US elections potentially affects the USD adversely and the cyclical recovery gains traction.
Equities: Let’s get cyclical
The positive macroeconomic trends and earnings growth should continue to be key drivers of positive performance for equities. However, during a US election year, equity volatility tends to increase around mid-year, which should open up opportunities for investors to allocate capital to cyclical segments of the market that could benefit from the expected global economic recovery, including quality mid-cap, industrial, and Japanese stocks.
Fixed Income: Be agile, be tactical
The world has changed for bond investors over the past four years, as massive fiscal stimulus has vastly increased the supply of government bonds. With central banks no longer being the buyers of last resort, the (over)supply of government bonds will likely result in higher yields for longer, albeit with large swings. Investors will need to become more agile and tactical. In the new environment, however, ‘bonds will be bonds’ again, returning to their role as income generators and diversifiers in a multi-asset portfolio.
Commodities: The renaissance of gold
While elevated interest rates confront Western safe-haven seekers with high opportunity costs for holding gold, Western governments sanctioning countries has led non-Western investors to seek assets beyond the reach of potential sanctions. This has greatly improved the risk/return profile of gold, making it not only an efficient diversifier in a multi-asset portfolio but also a hedge against an exogenous systemic risk in a multipolar world.
What does this mean for investors?
The emerging global trade recovery is supporting European and Asian economies, particularly in China, while US growth continues to be superior thanks to solid consumption and investment. This is the right time to stay invested, as we believe that any correction is unlikely to last and creates opportunities.
Equity investors should now consider adding cyclical stocks. Bonds should be a part of any diversified portfolio, but agility is key.
From a portfolio perspective, gold remains a hedge against systemic risks in financial markets, as well as further weaponisation of the USD.