House View Q2 2024 - Turning the corner
Our view of global markets
All eyes are on the US…
- With the scene set for a historic cut in interest rates, US developments are more key than usual for global markets. Based on the latest data, we think the US economy is heading for a soft landing – the holy grail for central banks, where they dampen inflation without tipping the economy into recession.
- With a mild slowdown in sight, the most likely date for the US Federal Reserve (Fed) to cut interest rates is now July – a “pivot” that represents an official invitation to re-enter markets after the 2022 reset and should provide continued momentum to bonds and equities in the coming months.
- The question then is how rapidly – and by how much – the Fed cuts rates. On this score, markets expect much less than they did in late 2023. We have thought for some time that US rates will be only 75bps lower by the end of 2024 – at best. US labour market resilience may give the Fed pause for thought.
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Chart of the quarter: Will the Fed “stick” the landing?
Our near-term cyclical model, which relies solely on high-frequency macro data, currently suggests only an 11% chance of a US downturn over the next six months.
Source: Proprietary recession model. Our cyclical macro model (PCA, probit) is based on 14 high-frequency cyclical macro indicators (business and consumer sentiment, labour market, housing, monetary, consumption, orders). Source: Allianz Global Investors Global Economics & Strategy, Bloomberg, Refinitiv (data as at 29 March 2024). Past performance does not predict future returns.
Position for selective opportunities amid bouts of volatility
- While investors are eyeing the Fed’s next move, markets are benefiting from a global economy showing more resilience than during previous periods of high interest rates, with signs that European and Chinese economies are also starting to bottom out.
- Healthy company earnings in countries including the US and Japan should support risk assets. Also: watch for the “wildcard” of artificial intelligence (AI) – any acceleration in implementation in the coming quarters could signal stronger productivity and lower inflation.
- There’s also the possibility that the Fed cuts rates less than the market expects if the US economy holds up better than anticipated (a “no landing” scenario). While good news for equities, this scenario could be challenging for government bond yields.
- Geopolitical risk has risen. To date, markets have done a good job of recalibrating for an environment of conflict and global tensions, particularly in a US election year. But the risk of a major “black swan” event should not be ignored.
- But the recent equity market rally signals that now is not a time for investors to sit on the sidelines. We do not think markets are overbought. There will likely be market volatility, but this can also present opportunities.
Consider the following:
- Equities: We take a constructive stance on the US where valuations are reasonable; China offers potentially attractive valuations and innovation potential.
- Japan: Improving corporate governance and the smooth normalisation of monetary policy support equity valuations.
- Technology: Some of the Magnificent Seven stocks are richly priced but the sector generally isn’t.
- Fixed income: Our preferred trade is curve steepeners in the US and Europe to benefit from rate cuts and the re-emergence of term premiums. In credit, on a risk-adjusted basis our preference is for investment grade.
See below for more details of our asset class convictions.
“With the prospect of the first US Federal Reserve rate cut in four years, we see a turning point ahead for the global economy, which should create new openings across asset classes. “