House View Q4 2024: Shifting gears
Our view of global markets
Watershed moment
- The fact that the interest rate cut by the US Federal Reserve in September was anticipated makes it no less of a watershed moment for markets. While the opportunity set for investors may not change overnight, we think it marks the beginning of the end of a period where technology stocks and cash (or cash-like instruments) have been the only game in town.
- In our view, a soft landing continues to be the most likely outcome for the US economy. The future trajectory of interest rates – including the speed of cuts and the new neutral rate – remains in flux. But we think markets expect more rate cuts than a soft-landing outcome would indicate, and a repricing of expectations could be one source of coming volatility.
- Overall, conditions should be positive for both bonds and equities, with a particular focus on developed-market equities, investment grade corporate bonds and sovereign bonds.
- We know from the brief turmoil in markets in August that every data point is pored over in the current uncertain environment: investors will want to consider an active approach to emerging opportunities.
- Staying vigilant, this is the time to consider positioning for an era where risk may be priced differently – and investors can consider more options – than in the recent past.
Chart of the quarter
Rate cut expectations: too aggressive?
Markets expect an aggregate of 135 bps of global cuts over the next year, compared with only 75 bps at the end of June.1 A significant chunk is expected in the US, more than would be anticipated in a soft-landing scenario. Therefore, we think a repricing of expectations may follow, sparking volatility.
Short on time? Download the summary of our House View Q4.
Multiple factors driving volatility
- Overall, we are positive about the months ahead, while recognising that we are entering a period of below-potential growth where downside risks will naturally increase. While not our base-case scenario, the risk of a US recession has risen. The challenge is that there is often little forward visibility of a downturn: labour market data tends not to trough until a recession has already arrived.
- Geopolitics are set to be a continuing source of volatility as events unfold in the Middle East and Ukraine, risking another potential surge in energy prices.
- The US election looms large, and the policies of the winner are likely to deliver a lasting market impact. We also see risks in Europe, where France and Germany are absorbed by domestic issues while growth and financial stability are vulnerable. There is the danger of broader euro zone instability, with implications for bond markets.
- Growth estimates for corporate earnings are relatively concentrated, and any risk of disappointment could also unsettle investors.
- In summary, after a period of relatively becalmed markets – notwithstanding the odd pick-up in volatility – prepare for a potential return of structural volatility in 2025.
Consider the following:
- Equities: Expect quality and growth to outperform amid lower rates; we add selectively to defensive sectors on US election volatility; consider water as a defensive play.
- Asia: Look at India where the growth potential may be worth the valuation premium; China could be a contrarian market benefiting from property market stabilisation; consider Japan again after drawdown in August.
- Fixed income: Consider long Gilts versus a basket of G4 markets; we prefer risk in curve and long duration in select markets and we see attractive relative value opportunities in sovereign yield curves. In investment grade, we favour financials on a relative-value basis, and emerging market debt for some positive fundamental stories despite sensitivity to US Treasuries.
See below for more details of our asset class convictions.
Structurally higher volatility in the months to come may give investors pause. But with returns on cash falling – and a broader set of opportunities coming into play – we think investors should reconsider their positioning.