Worries about a slowdown due to rising interest rates seem to be unfounded, especially in the US. Thus, amidst a changing landscape, we remain invested, making subtle adjustments to capture potential gains. The recent downturn across equity and bond markets presents an attractive opportunity to put money to work.
Our earlier forecasts predicted growth setbacks and falling inflation, driven by higher rates. Yet the US economy continues to show resilience, characterised by robust employment, wage growth, and increasing capital expenditure, which makes a US recession seem unlikely in the near term. The picture for Europe is less bright, as leading indicators point to slower growth, persistent inflation, and lower Chinese demand. As China searches for a new growth formula and investors await tangible growth-generating measures, the country's primary export ‘asset’ has become disinflation.
FIXED INCOME: Appealing Yields in Quality Bonds
We stand by the allure of quality (i.e. investment-grade) bonds, especially longer-dated USD and, to a lesser extent, EUR issues. Our conviction stems from the belief that persistent inflation will eventually recede and that after the rise in bond yields over the summer months, markets have now fully priced in major central banks keeping rates around current levels well into next year. Importantly, current yields are high enough to make nominal and real (i.e. inflation-adjusted) yields increasingly significant in diversified portfolios. While emerging market hard-currency bonds offer selective value and come with juicy yields, caution is in order until China’s outlook brightens. Now more than ever, an active investment stance and selectivity are of the essence.
EQUITIES – DEVELOPED MARKETS: Still in a (US) Bull Market
We anticipate an upward trajectory in equities as we approach year end, with any dips representing an opportunity to increase exposure. We prefer US over European equities, as US equities are driven by promising signs of an earnings recovery.
We remain committed to quality growth and defensive companies. The healthcare sector stands out in particular, thanks to its combination of defensiveness with growth potential as novel drugs receive approval. With receding US recession risks, investors may also consider some select cyclical exposure, especially companies set to benefit from the long-awaited spending on the country’s manufacturing infrastructure (including electrification).
EQUITIES – EMERGING MARKETS: Pick the Gems
While emerging market equities continue to carry concerns, pockets of promise persist. China’s growth struggle is casting a shadow, but India’s enduring growth story is worth noting and is a real alternative to China. Brazil and Chile are also on the radar, as their interest rate cuts are bolstering growth.
ARTIFICIAL INTELLIGENCE: Still Plenty of Opportunities
Artificial intelligence (AI) stocks remain top of mind, as fundamentals are so strong that they keep valuations mostly justified. We have a Constructive outlook on this investment theme, even after this year’s gains in AI-related shares. Semiconductor stocks are best positioned to benefit in the short term.
BALANCING ACT: US Dollar's shifting Outlook
The USD’s role in global trade remains pivotal and we are not in the ‘doom and gloom’ camp on the greenback. Yet, on a cyclical basis, some softening of the USD may lie ahead due to improved risk sentiment. Despite the EUR’s strength against the USD this summer, the US’s growth edge reduces the downward pressure. Meanwhile, the CHF continues to shine, although diminishing safe-haven demand and lower interest rates might temper its sparkle
