investment insights
Healthy economics, turbulent politics
The second half of 2024 holds major risk events, notably in politics, but the good news is that the economic picture looks healthy.
The world economy is growing, with a recovery in regions and sectors that have lagged US outperformance. Manufacturing and services are expanding, trade is rising and productivity is picking up, particularly in the US. With a resilient labour market, recession risks remain contained in the world’s largest economy. And even China’s activity is no longer deteriorating thanks to authorities’ efforts to re-direct credit from real estate to industry and manufacturing.
Falling inflation has opened the door to a rate-cutting cycle in developed markets. The Federal Reserve will be among the last to ease its policy, but we expect a first interest rate cut in September. And after the Fed cuts, we expect US rates to decline gradually, whilst remaining much higher than pre-pandemic levels.
Of course, the list of risks is long: inflation may come back, and public debt keeps rising. Political risks in Europe, US elections, and geopolitical tensions will at times take the wheel in the coming months, bringing more market volatility.
So far, the impact of politics and geopolitics on the real economy has been contained. Why? Because the two key transmission channels, energy markets and supply chains, are not showing much sign of stress.
At the same time, strategic competition is re-drawing trade routes and driving public and private investments into a range of sectors worldwide. After securing its energy independence, the US has now set its sights on retaining its strategic lead in sophisticated semiconductors. This looks like a new cycle in capital expenditure.
So what does this all mean for investments?
For now, we keep our overall portfolio risk, fixed income and equity exposures at strategic levels.
In fixed income, we still favour high quality bonds, and continue to capitalise on opportunities to lock-in today’s high yields. In sovereign debt, we like German Bunds and UK gilts. Elsewhere, selected European investment grade, global cross-over credit, and emerging market corporate bonds also offer opportunities.
In equities, solid corporate earnings growth for the rest of 2024 and falling interest rates should keep pushing most markets higher. Improving growth should particularly benefit cyclical stocks. We expect sectors and regions that have lagged so far this year to recover further. In time, the extreme concentration of US equity returns should normalise.
In currencies, we maintain our US dollar exposure. The dollar offers a yield advantage over other developed market currencies, and benefits from US growth and its haven status amid geopolitical risks. We expect support for the dollar to build in the run-up to US elections.
We will continue to employ highly active portfolio management and a disciplined risk approach to navigate a summer of extraordinary political risk.
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