House View Q3 2024: Act on volatility
Our view of global markets
Take the positives of a soft landing
- Markets are on divergent paths. A spike in political risk – with elections in France and the UK in Q3 and the US poll looming in November – adds to a theme of regional differentiation.
- Data increasingly points to a regional shift in growth expectations. We think this desynchronisation may generate opportunities across economies and asset classes.
- Our conviction strengthens around a soft landing in the US and global economies, where growth slows – and inflation comes down – without risking a recession. This scenario will likely be positive for equities, which are set to benefit from positive earnings growth. But watch for volatility around market and political news.
- Markets expect only 40bps of aggregate global rate cuts this year – down from three times that figure in early January. Different growth and inflation backdrops mean central banks have varying leeway to adjust their policy stance.
- A rate cut in the US is now likely in September, in our view. We think markets are too cautious on further cuts, and investors should use this disconnect to strengthen positions in yield curve steepening and duration.
Chart of the quarter: That desynching feeling…
The European Central Bank (ECB) cut rates in June and markets anticipate the US Federal Reserve (Fed) and Bank of England (BoE) will follow – at varying speeds. The Bank of Japan (BoJ) is expected to move the other way.
Stay agile while being wary of political risks
- The overall economic and market environment remains supportive of equities and bonds. A soft landing with lower inflation risk allows central banks to cut rates. In addition, company margins remain solid.
- Political risks are acute. France’s elections may spark caution from European investors, at least in the near term. November’s US elections could mean the re-election of Donald Trump whose policies may have far-reaching consequences, including on tariffs where fault lines within Europe are already evident.
- Progress has been made on inflation, but the last mile is often the hardest. While not our core scenario, we recognise the risks of a “no landing” – where the economy continues to run hot – which could be negative for bonds (and ultimately possibly for equities too).
- But this is not a time to sit on the sidelines. US inflation is approaching target for the first time in two and a half years and improved Fed guidance allows the market focus to switch to politics and growth.
- Even against the backdrop of overall slower global growth, an orderly rotation of growth expectations from region to region may be a healthy and stabilising development that supports the extension of the current expansion.
Consider the following:
- Equities: We are positive about the enablers of AI adoption (eg, data centres, cloud providers) and green transition. Select European small caps stand out for their high-quality balance sheets. We think the UK looks cheap and politically benign.
- Asia: Japan benefits from improving corporate governance. Investors might use volatility to target the more innovative and higher-yielding parts of China markets. We also like China government bonds.
- Fixed income: Picking up the divergence theme, we prefer yield curve and cross-market relative value including curve steepeners in the US and euro area (eg, Germany). We are positive on UK rates given underlying fundamentals and political outlook.
See below for more details of our asset class convictions.
Different growth and inflation backdrops globally will give central banks varying leeway to adjust their policy stance. This environment could make for fertile hunting ground for active investors – but watch for political risk.
