Monthly house view | July 2024

Macroeconomy

Purchasing manager indexes (PMI) for manufacturing in advanced economies were slightly disappointing in June. We will need to see PMIs improve again for the global economy to properly gain traction. We believe the US economy will moderate throughout the rest of the year, with a gradual cooling of the labour market contributing to a slowdown in household spending. We believe the Fed will cut rates by 25 bps this year—first in September and again in December. In the short term, we do not think the French elections will hurt the modest recovery underway in the euro area, but there are question marks further out. We expect two more 25 bps rate cuts from the ECB this year—in September and December. The political stability that comes from the Labour party’s resounding victory in general elections could provide a tailwind to UK growth, together with rate cuts. We believe the Bank of England will push through three quarter-point rate cuts before the end of the year. The Chinese economy continues to lack momentum, but we expect a pick-up in H2 as the authorities ramp up stimulus, helping to restore confidence to some degree. One near-term focus point will be the Communist Party’s ‘Third Plenum’ this month. We have raised our forecast for core inflation in Japan to 2.5% in 2024. Although the timing is uncertain, we expect the Bank of Japan to hike its overnight rate again this year. Manufacturing activity remains robust in Asian countries outside Japan. After the general election there, India continues to combine solid growth and declining inflation.

Asset classes

Equities. The narrowness of recent market returns, dominated by a handful of large-cap tech names, continues to be a source of concern in US equities. However, earnings growth in the US should broaden out in H2. Earnings projections for later this year remain relatively robust in Europe and Japan, but we need to watch the impact on investor sentiment of the French political morass and the fast developments in the presidential election campaign in the US. All in all, we remain neutral European and US equities. Sector wise, the fundamentals of European banks, including in the euro periphery, remain solid despite the political uncertainties, and we continue to see pockets of opportunity in the industrials sector. We also think that US energy may be worth looking at again and that energy stocks could be a beneficiary should investors rotate away from tech.

Fixed income. Elections in the UK, France and the US are pushing fiscal issues to the top of the agenda and will influence the direction of rates. While the election result in France seems to have reduced the chance of large, unfunded tax cuts, there is still a risk to France’s fiscal position. We expect the French state to continue to pay a higher risk premium to issue debt than before the calling of elections and we have raised our year-end forecast for the spread between Bunds and French government bonds. French and other European corporate issuers could also face higher risk premia, leading us to move from an overweight to a neutral position on euro investment-grade corporate bonds. The outcome of the US presidential election in November could also push up 10-year US Treasury yields beyond our year-end forecast of 4.3%.  

Commodities, currencies, commercial real estate. France’s budgetary problems could be complicated by the outcome of the parliamentary election, causing us to move from a neutral to an underweight position on the euro versus the USD. Nevertheless, the ECB can be expected to provide a solid rampart against excessive downward pressure on the single currency. Having shot higher earlier this year, copper prices have fallen back of late, in part because of a supply glut in China. However, copper could be supported by increasing investments in electrification in China and further efforts to stabilise the housing market. The commercial real estate market is still being seriously challenged, with a drop in transactions and falling valuations. However, there is hope that the worst of the repricing has passed. At the same time, rental growth for top-quality properties in prime locations remains resilient and demand for logistical centres continues apace.

Asian markets. After showing renewed appetite in May, investors in Chinese equities have turned more cautious again, judging as inadequate recent measures to stabilise the property sector. A near-term catalyst could be the Communist Party’s ‘Third Plenum’ this month and the beefing up of efforts to restore confidence in the property sector. Tech companies in Taiwan and Korea continue to do well, and the outlook for Indian equities looks structurally positive. After unprecedented spread narrowing, spreads on Asian corporate bonds widened again somewhat in June. With investor sentiment likely to be fickle as we approach the US elections in November, we retain our preference for higher-quality, investment-grade credits in Asia. In currencies, a strong USD continues to hang over the renminbi. Persistent trade tensions could also persuade the Chinese authorities to let the currency weaken.

Asset-class views and positioning

With elections are setting the stage for increased volatility across asset classes in the months ahead, country selection is more important than ever. Meanwhile, although a handful of AI-related tech stocks has continued to push the S&P 500 higher, the equal-weight version has sagged. Along with the fraught political situation, this argues for extra caution when investing in equities. Recent developments also increase the scope for bond and currency volatility. All things considered, this month we have moved from a neutral position on euro investment-grade credit to a neutral one in view of the uncertainty triggered by the election in France. We have also moved from a neutral position on the euro versus the USD to an underweight one—but from underweight to neutral on sterling. With fiscal discipline a burning issue, we maintain our strategically overweight position in gold.

Three investment themes

Focus on fiscal issues. This year is marked by a series of important elections around the world against the backdrop of concerns around high or rising public debt burdens. In these circumstances, country selection is of utmost importance. Our preference goes to countries with healthy fiscal dynamics. Increased volatility stemming from fiscal issues can be played through option strategies and currencies.

Transition from consumers to producers. We continue to find interesting structural opportunities 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.

Be selective in private assets. In a world where financing from traditional sources has grown scarcer, we believe that there is scope for appropriately calibrated private credit strategies that focus on quality. Sagging valuations and looser monetary policy should also mean uncorrelated, long-term returns are easier to find in private equity too.