Global Investment Outlook Q2
Key information panel
- The outlook for the global economy is fraught with uncertainties that could result in further market turbulence
- In the long term, we envision a ‘new paradigm’ featuring shorter economic cycles and more frequent supply shocks
- Against this background, we examine matters relevant to investor priorities today. These include the breakdown of bond-equity correlations; the role of ‘new diversifiers’ such as private credit; how investors should look at EM and frontier markets; the impact of evolving sustainability disclosure frameworks globally; opportunities in Asia; and whether US equity concentration should be a concern
The formidable task of steering towards a ‘soft-ish’ landing could result in more turbulence for markets ahead.
We remain in the midst of elevated policy risks and tight credit conditions where the prospect of a successful ‘soft landing’, while comforting, must be scrutinised through a lens of pragmatism. Signs that inflationary pressures have not entirely dissipated and the narrative of reaccelerating growth, led by the US, suggest that central banks may be on hold for a little while longer. Consequently, monetary policy looks set to be a drag on growth ahead in Western economies. Even if the proverbial soft landing sticks in developed markets, the runway is in an earthquake zone. Given the path to stability is fraught with uncertainties, our baseline scenario, aptly termed ‘soft-ish landing’, urges caution against complacency in portfolios.
Top of mind: Should we remain concerned about the breakdown of bond-equity correlations?
Short-run bond-equity correlations are at their most positive since the 1990s. Usually, stocks and bonds move together when the source of volatility is inflation. But as the global disinflation process continues in 2024, growth volatility is set to become more important again. That should mean a lower stock/bond correlation which is good news for investors. However, we argue that the future inflation profile will be somewhat higher and spikier compared to the 2010s. Consequently, the search for new diversifiers is on.
Top of mind: How should we look at EM and frontier markets?
The big story in emerging markets continues to be one of divergence. The idea that the asset class can be seen as homogenous is old fashioned, with country correlations much lower than investors probably think. Even in monetary policy, the trends are diverging: regional Latam central banks were early rate hikers and the monetary cycle seems to be ‘first in, first out’. Likewise, frontier markets offer low correlation of returns versus EM and DM indices, as well as between individual frontier economies.
Top of mind: has private credit reached peak?
Typically being floating rate structures, private credit investments clearly benefited during the sharp rise in interest rates since 2022 that hurt most other fixed income markets. With rate cuts on the horizon, investors now have a more complex decision to make within their credit allocations than they have had over the last 18 months.
Top of mind: What do evolving sustainability disclosure frameworks mean for companies and investors?
Within the first few months of 2024, notable regulatory adjustments have emerged from both the US and the EU concerning sustainability disclosures. Differences in standards pose challenges for investors looking to evaluate and compare reporting of emissions data from companies across jurisdictions. We examine developments in the EU, the US and Asia and the likely implications for investors.
Why Asian currency bonds are worth a second look.
A strong US dollar and the view that Asian currency bonds are difficult to access means they are out of favour in most global asset allocations. Yet inflation in most of Asia has been lower than elsewhere, resulting in shallower hiking cycles post pandemic. Growth forecasts for most of emerging Asia are reasonable without the need for monetary stimulus. And Asian central banks may also be keen to avoid currency weakness at a time when it could be unnecessarily disruptive to economic prospects. We examine the factors that investors should consider.
The ongoing contrast of Asia’s two largest markets
India’s strategic reforms and economic ascent contrast with the negative sentiment around China. While India’s continued growth trajectory is certainly not guaranteed, China faces more pressing uncertainty. This is reflected in valuations, presenting differing and inherently diverse considerations for investors.
Should US equity concentration be a concern?
As measured by the Herfindahl-Hirschmann Index, the US is currently an outlier in terms of equity market concentration, relative to other core markets and its own history. This is especially impactful to portfolios, given that US stocks now account for over 40 per cent of global market capitalisation. High concentration alongside high correlations between the top names within US equities has led to increasing idiosyncratic risks in market cap-weighted indices. However, opportunities to tilt US equity exposures must be assessed against the macro and market backdrop.