A year of distractions, distortions and decisions

Key points

• Despite signs of slowing economic growth, sticky inflation and postponed rate cuts, many equity market have hit record highs this year. But, with a US election due in November and continuing geopolitical turbulence, what lies ahead for financial markets over the rest of 2024?   
• On the economic front, potentially weaker US growth could be supported by a resurgence, of sorts, in the eurozone and the UK. The world’s second-largest economy, China, could add to the momentum.
• Appropriate diversification remains the bedrock of good portfolio management for long-term investors. On that score, the choice of investments, instead of market tilt, is likely to drive any portfolio gains. Here, we still prefer higher-quality exposure on the equity and the fixed income side. 
• Leaving aside any distractions and distortions, the most important decision facing investors for the rest of 2024 is: how to position my portfolio to reach my long-term goals? This bumper publication should provide the beginning of an answer.

The first half of 2024 was filled with uncertainty on many fronts: economic, geopolitics and markets being three. Unfortunately, the rest of the year is unlikely to be any clearer, amid key general elections in the UK and US, mounting geopolitical tensions and central bank indecisiveness.

Yet, to the surprise of many commentators, equity markets have climbed the ‘wall of worry’, registering numerous all-time highs. Even Chinese stocks have experienced a revival. As such, it’s critical to differentiate between the macroeconomic outlook and market sentiment. Sometimes, as seen frequently this year, bad economic news can be good news for investors. 

More of the same?

So, what to expect for the rest of this year and beyond? While uncertainty won’t fade completely (there is always something to worry about), the macroeconomic mists should clear somewhat. First, and foremost, inflation will probably continue to grind lower. Similarly, growth is likely to normalise.  

This means weaker US growth, but a more supportive momentum in the eurozone and UK. In turn, this should allow the leading central banks to finally initiate a normalisation of their own, by gradually lowering interest rates.

There are obviously risks around our central scenario. Inflation could prove even more sticky than anticipated, or an economic shock could send prices higher. Similarly, after a couple of years of tight monetary policy, evidence might emerge of businesses and consumers finally starting to feel the pinch, driving growth lower and possibly triggering a contraction. While either scenario appears to be a relatively low risk, investors shouldn’t ignore them. 

Is diversification really a ‘free lunch’?

The above risks are why we remain laser focused – and examined one hundred years of data for one of this year’s chapters  – on the importance of appropriate diversification at both the portfolio and the asset class levels. Continued uncertainty and demanding valuations, especially on the equity side, will require investors to be equally driven by upside potential and risk management. 

Security selection is likely to drive most of the portfolio gains in the coming months, rather than acting as a ‘tide that lifts all boats’. Here, we still prefer higher-quality exposure on the equity and the fixed income side, while introducing short-term, or tactical, sector and regional tilts. 

Meanwhile, risk management is not a matter of being invested or not. It’s about finding opportunities that can produce attractive returns for a given level of risk. On that note, and with bulging fiscal deficits in many top-ten economies, investors should be mindful of allocations to what they consider to be ‘risk free’ investments. Even cash, as seen from the recent explosion in inflation rates, isn’t riskless after taking into account the purchasing-power erosion that higher prices can inflict on your wealth.  

Similarly, the need for incorporating climate risk in the assessment of portfolios’ long-term exposures is becoming ever more relevant but also more complicated. A disciplined, all-encompassing approach to sustainable investing appears to be essential to truly account for the challenges raised by the ongoing energy transition away from fossil fuels.

Keep focused and avoid needless distractions 

Staying invested remains, in our view, the key to meeting your long-term goals. While this might be a big year for elections, not least in the US, it’s important to remember that economic activity has a much larger influence on markets than politicians. Indeed, whoever next resides at the White House or at 10 Downing Street will likely have their policies heavily guided by the shape of the global economy, in addition to financial markets. With sizable fiscal deficits, the scope for turning on the spending taps will be limited. 

In summary, there is a long list of possible distractions this year that may occasionally distort financial markets, possibly creating opportunities for investors. But beyond that, the most important decision over the remainder of 2024 is: how to best position my portfolio to reach my long-term goals? This bumper publication should provide useful and timely insights in the search for an answer.