The world is going through a period of uncertainty. Although the perils of Covid appear to be over, geopolitical tension, wars, elections and sluggish macroeconomics are all things investors may be concerned about for the remainder of 2024.
Hetal Mehta, head of economic research at St. James's Place (SJP), believes there are some important areas that will shape markets over the remaining six months.
The first is economies worldwide, which are in various stages of either recovery of repricing. “Recession risks have subsided, but the conditions necessary for strong economic acceleration are not yet present,” he said.
The overall picture is an improving one, with global economic uncertainty broadly returning to pre-Covid levels.
Heading around the world, in the US a ‘soft landing’ scenario of inflation gradually reducing and growth picking up remains on the cards, but issues persist. “Inflation is on a gradual decline, but services inflation is still elevated and higher commodity prices are filtering through to the economy,” he added.
However, the upcoming US election adds a layer of uncertainty that could affect market volatility, said Mehta. He believes the result is “too close to call”.
In the UK meanwhile, the new Labour government is likely to leave high-level policies unchanged and will have little ability to “borrow or grow its way out of trouble” as inflation and wages are still “too high for comfort”.
For emerging markets, China still looms large, he noted, with “scepticism about Chinese stimulus”. However, inflation is less of a concern here.
Justin Onuekwusi, chief investment officer at SJP, said interest rates will play a big role for the rest of the year.
“Central banks face high-stakes decisions. After years of hiking interest rates, attention is turning to how quickly and easily central banks can reverse course,” he said.
In June, Canada became the first country in the G7 to cut rates, with the European Central Bank opting to follow suit soon after.
It is a different story in the UK, where inflation has fallen to 2% but the Bank of England’s key metric – service sector inflation – remains at 5%.
This is even worse in the US, where the Federal Reserve is contending with 3% inflation. Onuekwusi said here it was “even stickier, which could cause the Fed to be “even more cautious”.
Even if rates do fall, however, investors should not expect them to go back to the ultra-low era of the recent past.
How SJP is investing
Onuekwusi noted that higher interest rates should be good for equities, but not those that are heavily indebted. “Focusing on companies that are less sensitive to higher interest rates, especially those with strong balance sheets, low debt levels and solid cash flows, can be prudent,” he said.
Robin Ellis, director of portfolio strategies at SJP, added that markets are likely to be more volatile, but still able to deliver “attractive risk-adjusted returns”.
The firm is underweight the US, although it remains the largest regional allocation across the firm’s Growth Portfolios, as well as the Polaris and InRetirement ranges.
"This boils down to recent high performance and valuations. We believe it is wise to diversify more into other global markets to balance future risks and returns. Specifically, we increased our allocations to developed markets outside the US, which we feel are well placed to provide good returns from a cheaper starting point,” he said.
On bonds, Onuekwusi said interest rates have upped yields and made bonds attractive, particularly if central banks are slow to cut. Fixed income therefore “once again provides effective diversification”, he added.
This also impacts alternatives, where “the bar for incorporating alternatives into our portfolios has been raised” as the risk-reward potential for owning these assets instead of bonds is lower.
Ellis noted the firm’s multi-asset ranges are “more constructive” on the outlook for government bonds, both in terms of yield and diversification, moving this allocation towards neutral at the expense of corporate bonds, which have “continued to benefit from strong demand and supportive credit conditions”.
“Following robust performance and a tightening of spreads across corporate bond markets, we have now reduced our positioning to neutral,” he concluded.