Welcome to the Investment Perspectives Mid-Year 2024 Outlook. With major central banks moving closer to, or in some cases already implementing, interest rate cuts, M&G Investments’ Chief Investment Officers (CIOs), fund managers and investment experts explore what this new policy direction might mean for financial markets.
Amid a complex macroeconomic backdrop and political and geopolitical uncertainty, the descent from the peak could be bumpy, but we believe there is currently a wide array of promising opportunities for disciplined selective investors, across public and private markets.
Bringing together expert views from different asset classes, we seek to illuminate for our clients the investment landscape and map out potential opportunities.
Shifting narratives and diverging policies
The outlook for monetary policy has continued to dominate financial market commentary this year. At the start of 2024, markets were implying multiple interest rate cuts, but since then the narrative has shifted dramatically as investors have pushed out their expectations for when those cuts will take place.
However, in contrast to much of the previous two years, changing rate expectations have resulted in different outcomes for fixed income and equity markets. So far this year most bonds have been weak, but because this has been the result of resilient growth and stubborn – not rising – inflation, equities have moved higher.
Global stock markets have reached record highs, initially driven by continued excitement about the potential of artificial intelligence (AI) but ultimately broadening out beyond the US and technology. Investors have even returned to formerly unloved stock markets in the UK and China.
In her ‘Hidden gems of innovation’ section, Fabiana Fedeli, CIO Equities, Multi Asset & Sustainability, discusses this trend, observing that the market is broadening and stock-specific drivers are coming to the fore. In her view, share price performance has been driven by companies beating earnings expectations and successfully delivering innovation. The combination of undemanding expectations and the power to innovate will be among the best hunting grounds for the creation of alpha in future, according to Fabiana.
As the valuations of many innovative companies have risen spectacularly, in order to harness the potential of innovation and new technologies, Fabiana believes investors need to dig deeper and broaden their search to discover the hidden gems of innovation that are delivering differentiated products and solutions across the globe.
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Wherever mentioned, past performance is not a guide to future performance.
The views expressed in this document should not be taken as a recommendation, advice or forecast and they should not be considered as a recommendation to purchase or sell any particular security.
Focus on central bank policies
As we look ahead to the second half of the year, the main focus for investors may well continue to be central bank policies and the path of interest rates. With the experience of the last couple of years and policymakers’ “data dependent” approach, it is perhaps not surprising to see significant market myopia: investors obsess over every relevant data release to try and anticipate the Federal Reserve’s (Fed) policy moves. This ‘guessing game’ has arguably contributed to short-term volatility, such as the wild swings in bond markets seen in the second half of 2023, and could continue to be a source of opportunity for longer term investors.
CIO Jim Leaviss and the Fixed Income team believe that inflation will continue to ease, providing hope for the prospect of rate cuts by the Fed this year. However, they caution in ‘Approaching the descent’ that we could be entering a new era of structurally higher inflation, which might mean interest rates settle at a higher level than they were before this rate-hiking cycle.
The team also notes that we are beginning to see central bank policy diverge. Some central banks, notably the European Central Bank (ECB), have begun easing monetary policy ahead of the Fed. In their view, this divergence offers potential opportunities for fixed income investors to diversify across geographies and sectors.
Significantly, the prospect of rate cuts provides a potential opportunity for fixed income investors to capture attractive gains, according to the team. In particular, they believe the current macroeconomic environment is relatively supportive for investment grade (IG) credit, as many IG companies remain in a strong position, having locked in low financing costs for an extended period.
The rise in real (inflation-adjusted) interest rates has had a significant impact on many private markets, says Emmanuel Deblanc, M&G Investments’ new CIO of Private Markets. On a long-term view, Emmanuel suggests this has actually been a positive for private markets: it avoids the misallocation of capital, fundamental in correctly pricing assets.
Despite a challenging environment, Emmanuel believes opportunities persist in the ‘value-add’ and opportunistic areas of private markets, including real estate and infrastructure. Structured credit also looks attractive, in his view, with growth driven by the ongoing retrenchment of banks.
For Emmanuel, there are grounds for optimism but investors need to have a clear focus and be selective in their approach to private markets
Politics and markets
So far, “the year of elections” has not proved to be especially dramatic, with few surprise results. However, this could change with the US presidential election in November. While the possible re-match between Joe Biden and Donald Trump is inevitably attracting plenty of media attention and speculation, the impact of the vote on markets is near impossible to forecast. It is worth remembering that the Trump victory in 2016 resulted in market moves that were almost the total opposite of those predicted by pundits.
As the election approaches, we will inevitably learn more about the candidates’ policies. Although it will be hard to ignore the political clamour, it is worth bearing in mind that, from a long-term investment perspective, what really matters is meaningful policy changes that could have a significant impact on the economy. The rest is just ‘noise’ that could create tactical opportunities for long-term active investors to exploit.
Embracing the long-term
After a positive start to the year, the investment landscape remains challenging, with major macroeconomic and political events looming in the coming months, as well as the broader backdrop of geopolitical tensions.
By looking beyond the day-to-day noise and adopting a longer-term investment horizon, we believe active selective investors can position themselves for future success and even reap rewards when volatility is elevated.
Patience is a valuable aspect of investing. In the current environment of heightened unpredictability and as the world continues to adapt to a higher interest rate regime, staying focused on long-term goals is arguably more important than ever.
Read perspectives from our CIOs on the main factors driving equity, fixed income and private markets and what might lie ahead for financial markets in the second half of 2024.
Approaching the descent
Jim Leaviss, CIO, Fixed Income
As central banks prepare to cut rates, will the path down from the peak be bumpy?
16 min read
Hidden gems of innovation
Fabiana Fedeli, CIO, Equities, Multi Asset & Sustainability
Adopting a broader approach could help investors discover highly innovative companies across the globe.
19 min read
Strong focus on private markets
Emmanuel Deblanc, CIO, Private Markets
Opportunities persist in private markets, in our view, for investors with a clear focus and selective approach.
14 min read
Connecting the Dots: Mid-year investment perspectives with our CIOs
This debut episode of Connecting the Dots features investment perspectives from Fabiana Fedeli, CIO, Equities, Sustainability and Multi-Asset; Jim Leaviss, CIO, Fixed Income; and Emmanuel Deblanc, CIO, Private Markets at the mid-way point of 2024.