investment insights
Ten investment convictions for H2 2024
A moderately healthy macroeconomic backdrop, with equities hovering around record highs, contrasts with rising (geo)political risks. How should investors navigate the second half of 2024? We set out our ten strongest convictions.
The first half of 2024 saw market fears of a recession transform into optimism over stronger-than-expected economic growth. In the second half (H2), the investment environment should still be driven by the disinflation trend and the path of interest rates but should also focus on political risks, notably the US elections and geopolitical competition. The prospect of such changes should translate into episodes of market volatility.
Global growth remains resilient and inflation should continue to decline in key economies. Activity in China is no longer deteriorating. Developed market central banks (except for Japan) are trimming interest rates – or will do soon in the US and UK. However, we think that a year or more from now, the cost of capital will remain higher than before the pandemic. Some residual risks to inflation remain, and political decisions – including a new Trump presidency – could also have an impact.
For investors, this means that higher quality fixed income is still an attractive source of income and portfolio stability. Our preferred investments are German Bunds and UK gilts, European investment grade credit, select ‘crossover’ corporate bonds (or those rated BB and BBB), and emerging market credit. In Switzerland, listed real estate exposure can add yield to a portfolio.
Despite the above-mentioned challenges, we see more potential in equity markets as well. We expect stocks to benefit from solid earnings growth, and the intense concentration of US equity returns to normalise at some point. We believe select cyclical stocks, reasonably valued regions and sectors that have lagged so far, and our rethink investment thematic exposures can all add value to portfolios. In our view, thematic exposures that build on transformations underway in sustainability, demographics, infrastructure and technology can improve a portfolio’s resilience through business cycles.
We expect the still-resilient US dollar to remain firm versus both the euro and sterling. In alternative asset classes, we maintain a constructive outlook on gold and see opportunities in broader commodities as demand for raw materials rises with the sustainability transition. For eligible investors, private assets can complement portfolio returns and diversification.
While economic health and central bank policies will continue to drive financial markets through the rest of 2024, we expect political events to grab the wheel every now and then. Below, we set out our ten strongest investment convictions. The second half of the year will be a challenging environment that, we believe, will continue to reward an active approach to balancing risk and new investment opportunities.
Investment views going into H2 2024
Portfolio risk – maintain a neutral stance
1. Keep tactically neutral portfolio risk, adjust exposures as opportunities arise
Our macroeconomic scenario is constructive for financial markets but given geopolitical risks in H2, we want to be risk conscious and position for a range of economic and market scenarios. We therefore keep portfolio diversification at the core of our strategy. Bouts of risk aversion may trigger temporary drops in current high equity-bond correlations, which argues for a balanced exposure to high quality bonds. However, such instances may open up opportunities in other risk assets and we stand ready to invest in those as they arise.
Fixed income – prefer high quality bonds and selected carry opportunities
2. Capital gains in fixed income should modestly improve
Fixed income can provide an income stream for conservative investors and is a useful instrument to lock in high yields for buy-and hold investors. Still, interest rate cuts have started and should extend as inflation falls in H2. We expect modest bond prices gains (adding some returns on top of coupons), as yields fall. The European Central Bank and Bank of England are likely to cut rates before and to a larger extent than the Federal Reserve. We prefer German Bunds and UK gilts over US Treasuries (hedged against the portfolio reference currency) in H2. We prefer bonds with five to seven year maturities, as these stand to gain from the start of policy easing, but suggest investors a flexible approach to managing the duration of bond exposures, especially in the US, given uncertainty over politics, fiscal policies and inflation.
3. Seek opportunities for carry with selected bond exposures
Political risk and the start of the US presidential election campaign may keep volatility elevated. With spreads already tight, returns from corporate credit may be limited in the near term. Throughout H2, however, opportunities may arise to capture carry (a pick-up in yields). Within investment grade (IG) bonds we like euro (EUR) over US dollar (USD) denominated bonds on a dollar hedged basis, which helps extract additional carry. We believe select ‘crossover’ (BBB/BB rated) credit still offers a good risk-reward in an environment of improving growth and disinflation. We also prefer emerging market (EM) hard currency corporate bonds over EM sovereign debt, as EM credit offers better diversification and a higher rating quality. The yield premium over EM sovereign bonds (excluding those rated-CCC) also remains attractive.
Equities – a neutral stance for now, preference for cyclicals and lagging regions and sectors
4. Favour cyclical stocks
Equities look set to offer more upside than bonds over the course of H2, but concentration (in the US market) and geopolitical risks have increased and may trigger near-term volatility. We see equities being supported by high-single-digit earnings growth and rate cuts in H2 and stand ready to take advantage of opportunities in selected cyclical sectors, notably energy, materials, consumer discretionary and communication services. Our sector preferences could evolve in line with US election outcomes.
5. Lagging regions and sectors to catch up
In the first half of the year, we progressively built exposures to fairly priced markets that had lagged a generally strong equity performance to date. The UK stock market was a first step in this direction. It offers reasonable valuations, decent earnings growth, a sound macroeconomic outlook (interest rates headed lower, weak sterling) and potential inflows as a result of domestic pension reforms. We believe that selected EM equity markets may also offer fairly priced growth exposure; we highlight Taiwan, South Korea and India. Our least preferred region remains the eurozone, which recently suffered from the political uncertainty triggered by EU elections, and should continue to trail world indices on weaker earnings prospects.
6. Thematic equity exposures can help increase portfolio resilience
For investors keen to build more portfolio resilience and capture longer-term growth drivers, our thematic equity framework offers new opportunities. This builds on our analysis of fundamental transformations underway in our economies and societies – from changes in longevity, demographics, infrastructure, and the sustainability transition – and seeks to capitalise on the listed equity opportunities that flow from them. Investors willing and able to withstand some short-term volatility in this portion of their portfolios can build exposure to our preferred thematic stocks.
Currencies – USD to remain supported
7. Continued dollar strength
The US dollar (USD) still benefits from a yield advantage over other G10 currencies and from relatively weaker growth outside the US, including in China. This is likely to remain the case in H2. However, US political and related fiscal risks, the dollar’s overvaluation, the progressive rise of gold at the expense of the USD among central bank reserve allocations and a ‘multi-polar’ world cast some doubts over the longer-term sustainability of dollar strength. Nevertheless, we think the USD will continue to appreciate versus the euro and sterling in H2, as solid US growth, a faster European rate-cutting cycle and cost of carry will continue to provide an edge to the USD, which also helps to diversify portfolios. We continue to see the euro losing ground against the Swiss franc even if a near-term consolidation is likely, as interest rate differentials narrow and geopolitical risks justify demand for other haven assets.
Commodities – demand rising
8. Commodity prices could see solid gains ahead
Amid geopolitical uncertainty, safe and reliable access to natural resources is imperative, especially as the draw on these resources will be heavier amid the transition to a net-zero economy. We see lasting shifts in commodity markets. Industrial metals, especially copper, face new structural demand from electrification and the expansion of data centres required by the rise of artificial intelligence. Alternative building and packaging materials such as timber should also see growing demand as the rise of carbon prices and the expansion of carbon trading markets increasingly allow natural resources to be fairly valued. The complex geopolitical and financial environment makes gold more important for central banks as a reserve asset. We expect gold prices to remain supported, despite a resilient USD – as the two often move in inverse directions. Bouts of risk aversion could hamper commodity prices, but we would use price weakness to (re)build exposures to industrial metals.
Alternatives – a key diversification pillar
9. Alternative strategies can offer income and diversification
For Swiss franc investors, we think the low level of bond yields can continue to support listed Swiss real estate funds, which currently offer an attractive yield pick-up over Swiss sovereign bonds. In hedge funds, our conviction in global macro and trend-following strategies remains strong, but we also seek to capitalise on a broader array of opportunities. These include strategies that are designed to take advantage of heightened corporate activity, including mergers, acquisitions and restructuring (event-driven strategies) and long-short equity strategies, as the environment for stock picking improves amid a normalising macroeconomic environment and a return of volatility.
10. Private assets can strengthen portfolios for eligible investors
For investors with a long-term investment horizon and the ability to hold investments that may not be easy to buy and sell, we believe private assets can play a valuable role in diversified multi-asset portfolios. The inclusion of the asset class can enhance portfolio returns, lower volatility and improve diversification, as well as provide access to innovative and fast-growing companies that are increasingly staying in private hands rather than seeking to list on public markets.
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