Monthly house view

Macroeconomy

A look at purchasing manager indexes suggests that manufacturing may have turned the corner in advanced economies, including in Europe. Signs that the economy is gathering some momentum enables us to lift our GDP growth for the euro area to 0.8% in 2024, up from our previous forecast of 0.6%. After a well signposted June rate cut, we believe the ECB could remain on hold until September before it resumes monetary easing, with a total of 100 bps of cuts in its deposit rate on the cards by year’s end. In the US, we expect growth to moderate somewhat in H2 but to remain solid. Given our expectations for core inflation, our central forecast is for the Fed to decide a first quarter-point rate cut in September followed by another one in December. The July general election in the UK is likely to return the Labour party to power. The prospect of a stable, centrist and fiscally responsible government could be welcomed by UK markets. China unveiled another plan to stabilise the property sector in May. The jury is still out on its chances, and any recovery is likely to be shallow and gradual. Chinese fiscal policy is set to remain stimulative, but trade friction with the US and Europe remains a concern. We have lowered this year’s growth forecast for Japan from 0.7% to 0.2% on the back of recent quarterly GDP reports. It is increasingly likely that the Bank of Japan will raise rates again in the coming months, in large part because of concerns about the yen’s weakness.

Asset classes

Equities: Developed-market equities bounced back in May, but gains on the S&P 500 remained highly concentrated in the largest index constituents, all tech-related. Looking ahead, after a broadly positive Q1 earnings season, the expectation is for robust earnings for S&P 500 companies overall in Q2. Most European companies should also report good earnings, but overall figures could be dragged down by difficult year-on-year comparisons for a few large-cap names. Valuations remain more attractive in Europe and Japan than in the US. In terms of sectors, we continue to like industrial stocks, which are underpinned by structural drivers like automation, digitalisation and electrification. We also still see select opportunities in European banks, which are cheaper, have better fundamentals and face fewer regulatory headwinds than their US equivalents. We remain cautiously optimistic on the Chinese equity market in the near term while keeping an eye on the success of recent economic stimulus. We remain structurally positive on Indian equities, provided we see policy continuity in the wake of the general election.

Fixed income: Market pricing of central bank rate cuts in the US, euro area and UK has lately been overshooting our own expectations. We therefore continue to expect 10-year government bond yields to fall below their current levels by year’s end — although fiscal concerns mean there is some upside risk, especially for US Treasuries. Elevated yields have been helping the performance of corporate bonds and narrowing their spreads over government paper. Historically narrow spreads mean we remain underweight noninvestment-grade bonds. We also expect some widening of spreads on investment-grade credits. The delay to Fed rate cuts could affect the appeal of US investment-grade bonds relative to cash and short-term instruments, but the euro investment-grade market still looks attractive.

Commodities, currencies: Amid signs of slackening demand in some major markets, the oil market has been slightly oversupplied in the past couple of months. This could hasten the decline in the price of Brent crude oil to below USD80 per barrel, compelling OPEC+ to try to push through new production cuts. There have been some early signs of EM currencies clawing back lost ground against the USD after a tough April. But with the exception of the Chilean peso, Latin American currencies have not partaken in the rebound. The South African rand, by contrast, has benefited from less-negative investor sentiment and hopes for a market-friendly coalition government.

Asset-class views and positioning

There are two changes to our asset-class convictions this month. We have moved from a neutral to a tactically overweight stance on liquidity. This largely reflects our expectation that short-term rates in the US will stay high for a while yet as the Federal Reserve moves back its first policy rate cut (to September, according to our latest assessment). Attractive short-term yields mean that investors continue to be ‘paid to wait’ before deploying cash. In parallel, we have moved from an overweight to a neutral stance on US investment-grade corporate. The delay to Fed rate cuts and the historic tightness of spreads has dented the risk-reward argument for these assets compared to cash, although we continue to see attractive opportunities in high-quality credits, especially in Europe. At the same time, we are still underweight noninvestment-grade bonds in both the US and Europe. We remain neutral on equities overall, especially in the US, but see active-management opportunities in select markets and sectors. We are especially eying the strengthening relative performance of European small- and mid-caps and believe there may still be short-term tactical opportunities in China. We are also neutral on government bonds overall while we believe the revival of M&A will produce opportunities for event-driven hedge fund strategies.

Three investment themes

Engage in M&A’s revival. A recent rise in big-ticket deals points to a resurgence in M&A after two years of subdued activity. So far, most of the rebound has been in the energy, tech and financial sector, but deal activity could spread to other regions and sectors on the back of rising
equity prices and falling interest rates.

Capitalise on AI’s promise. We believe strongly in AI’s promise, with GenAI improving productivity and increase innovation. Outside various tech subsectors, we believe that areas of healthcare stand to among the largest beneficiaries of advances in AI. Most immediately, we think that AI’s substantial energy needs will boost power companies and providers of energy infrastructure.

Transition from consumers to producers. With the global manufacturing cycle looking like it may have bottomed out, we believe there are interesting structural opportunities to be had in parts of the industrial sector. Our favourite themes include electrification, decarbonisation, digitalisation and the quest to build more robust supply chains. These themes could be joined by increased defence spending. As always, stock selection is paramount.