Monthly house view | August 2024

Macroeconomy

We expect US growth to slow in H2, with a cooling labour market impacting consumer spending. Job trends, including layoffs, will need to be closely monitored. We now believe the Federal Reserve will cut rates by 25 bps in September, November and December, with a chance it cuts more forcefully should we see a major deterioration in the economy or credit market (not our central scenario). Political uncertainty in France may have only a limited impact on the broader euro area economy in the short term but could pose a risk to the outlook for 2025. We expect the ECB to resume its rate-cutting campaign in September, with another cut in December. The fading of political uncertainty should prove a fillip to the UK economy, especially as the Bank of England embarks on rate cuts. After slowing markedly in Q2, we believe China’s economy will pick up momentum again in H2 as the government ramps up stimulus. Meanwhile, India’s final FY 25 budget continued to focus on macro stability and is pro-growth overall. Measures of inflation expectations have been rising of late, leading the Bank of Japan to further tighten its monetary policy at end July.

Asset-class views and positioning

We remain neutral global equities and are playing the recent upsurge in volatility through structured products. The Q2 earnings season is showing a welcome widening of earnings growth beyond a handful of tech-related stocks in the US. But for the revival in small caps and cyclical stocks to be sustained, we will need to see decent economic growth as well as rate cuts and upward earnings revisions. At the same time, signs that enthusiasm for the AI theme is waning somewhat could have wider repercussions and argues for a focus on defensive equities. Within an overall stance on global government bonds, attractive yield and the clarity provided by the UK general elections help justify our continued overweight position in gilts and our move from an underweight to neutral position on sterling. While corporate bonds have continued to perform, helped by prospects of cuts to policy rates, we continue to concentrate on quality and believe ever-more selectivity as the market backdrop becomes more complicated and volatility picks up.

Developed-market equities / Commodities

Overall, Q2 is shaping up to be a decent reporting season in the US, but less so in Europe, especially when it comes to meeting sales expectations. Yet even in the US, positive surprises have declined somewhat and earnings guidance is mixed. At the start of August, signs of a rotation from large-cap, tech-related names in the US to more rate-sensitive small caps and cyclicals was stopped in its tracks as concerns rose about US growth. Equity volatility has been rising and should remain a factor for the rest of this year as US growth slows and the November elections approach. Commodity prices have declined significantly since early July. Although demand has weakened recently (notably for copper, where we now have a supply overhang), the declines seem excessive at this stage. Developments in the US elections have probably been a factor, with fading optimism that we will see deregulation in the US oil industry. Tech’s recent misfortunes have also probably helped drag down commodity prices.

Fixed income / Currencies

We continue to expect the US election outcome to have a significant impact on US Treasury yields, with upside risks in case of a Republican ‘clean sweep’, and downside risks in the case of a Democratic win. But concerns about US growth also enter into the equation. While markets may have been going too far in their pricing, the prospect of three 25 bps cuts to the Fed funds rate by year’s end (and more if necessary) should keep downward pressure on US Treasury yields. Spread widening at the start of August is helping to persuade us to remain underweight high-yield corporate bonds, but we remain neutral investment-grade (IG) bonds, with relatively short-duration IG credits offering a good alternative to cash as central banks cut rates. While the November elections in the US will likely determine the path of the USD over the long term,  in the near term markets remain fixated on central banks’ response to disinflation and inflation expectations. Recent lower-than-expected consumer inflation and signs of slowing growth in the US have reignited expectations for a near-term start of the Fed easing cycle. This has chipped away at the value of the USD even though the Fed could yet disappoint investors.

Asia assets

Chinese equities have remained in the doldrums of late, with the Communist Party’s ‘third plenum’ in July failing to impress investors in the absence of any major market-friendly initiatives. While there are opportunities in select sectors benefitting from cyclical policy support, a broad-based market rally is still not in sight. The prospect of policy continuity in India after the recent general election means we maintain a structurally positive outlook on the Indian equity market. Meanwhile, Taiwan, the best-performing Asian market so far this year, saw a sharp correction in July in sympathy with US mega-cap tech companies. Heightened investor defensiveness could challenge Asian corporate bonds in the run-up to the US presidential election in November. We maintain  our preference for high-quality Asian credits offering good carry and of relatively restrained duration. On the currency front, we continue to see room for the renminbi to weaken against the USD.