Descent from the peak – Investment Perspectives Mid-Year 2024 Outlook

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.

In contrast to much of the previous two years, changing rate expectations have resulted in different outcomes for bond and stockmarkets. So far this year most bonds (loans normally issued by a company or government) have been weak, but because this has been the result of resilient growth and stubborn – not rising – inflation, equities (shares in companies) have moved higher.

Global stockmarkets 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 UK stockmarket.

Fabiana Fedeli, CIO Equities, Multi Asset & Sustainability, notes 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. A combination of undemanding expectations from investors and the power to innovate will create one of the best grounds for the creation of future above-benchmark returns, according to Fabiana.

However, she believes that as the valuations of many innovative companies have risen spectacularly, in order to harness the potential of innovation and new technologies, 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.

Focus on central bank policies

As we look ahead to the rest 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’s perhaps not surprising to see significant market myopia: investors obsess over every relevant data release to try to 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.

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 that we could be entering a new era of structurally higher inflation, which might mean interest rates settle at a higher level than where they were before this rate-hiking cycle.

The team also notes that we’re 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 bond investors to diversify across geographies and sectors.

Significantly, the prospect of further rate cuts provides a potential opportunity for bond 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 (also known as corporate bonds), as many IG companies remain in a strong position, having locked in low financing costs for an extended period. IG corporate bonds are fixed income securities issued by companies with medium or high credit rating from a recognised credit rating agency. They are considered to be at lower risk of default than those issued by issuers with lower credit ratings. Default means that a borrower is unable to meet interest payments or repay the initial investment amount at the end of a security's life.

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. Private markets comprise of investments which are not traded on stock exchanges, and which can include private equity, private debt and real estate. They’ve historically been dominated by institutional investors, such as pension funds or investment banks. 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-added’ and opportunistic areas of private markets, including real estate and infrastructure. Structured credit – financial assets such as loans and mortgages that are packaged into interest-bearing securities – also looks attractive, in his view, with growth driven by the ongoing retreat of banks from this area.

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 proven to be especially dramatic, with few surprise results. However, this could change with the US presidential election in November. While the contest between the new Democratic nominee Kamala Harris and Republican Donald Trump is inevitably attracting plenty of media attention and speculation, the impact of the vote on markets is near impossible to forecast. It’s 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’ll inevitably learn more about the candidates’ policies. Although it will be hard to ignore the political clamour, it’s 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.

Past performance is not a guide to future performance.

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