Investment Team Handelsbanken Wealth & Asset Management
09 Jul 2024 15
Below, we outline some of our key views on the factors set to drive financial markets over the coming months, and what this means for our investment strategies.
What's next for the global economy and financial markets?
The UK election is unlikely to move the dial for global markets
We’re in the midst of a post-election media storm, but the simple truth is that the advent of a new Labour government is unlikely to have any great impact on global financial markets. Despite quick market reactions in select areas (such as a boost for house builders, given Labour’s touted plans in that regard), investors have generally taken the well-telegraphed political landslide on the chin.
To put the UK election in context, in 2024, countries which collectively represent more than half of the world’s population have already held or are soon to hold political elections. When it comes to potential impact on the global economy, there’s one clear standout event: the US presidential election.
All eyes on the US contest, where risks are higher
As we write, pressure is building on President Biden to take the unorthodox of stepping back from the presidential contest. The odds of his erstwhile running mate – Kamala Harris – running for president without Biden have risen sharply. But while the Democrat Party’s nomination for president may be in disarray, the Republican nomination seems more fixed. What would a second Trump presidency mean for markets?
When an avowedly pro-growth Trump was elected to his first term as president in 2016, we positioned our investment strategies in anticipation of an upbeat market mood, and benefited accordingly. Would this work a second time around? We’re not so sure. The ‘easy wins’ for Trump – like corporation tax cuts – have already been achieved. His rhetoric around NATO, Ukraine and European and Chinese trade tariffs is also concerning – rewriting policies in these areas could create fresh, unwelcome inflationary pressures.
Importantly, the US presidential election still has a lot of moving parts to contend with, on all sides. For now, we’re poised to watch and wait.
Keeping a close eye on US consumers
The sharpest interest rate rises in history have been designed to slow down economies, in order to take the heat out of inflation. These interest rate increases appear to have been doing their job… but have they been working a little too well in the US?
Recent economic updates from the US have been rather mixed. The downwards trend in inflation seems to be on track, and economic growth looks like it’s slowing without crashing. However, the latest private sector survey data points towards economic contraction in both the manufacturing and services sectors. This data is forward-looking, providing real-time predictions rather than historical results. Recent consumer data has also been hit and miss – and don’t forget that consumers are the most powerful driving force behind the US economy.
While we’re reserving judgement for the time being, we’ll be keeping a cautious eye on US economic data over the coming weeks, and watching for any signs of change – for better or worse.
Our chart of the month
Source: Bloomberg, market implied policy rates, data correct to May 2024
What does this chart tell us?
This chart shows us an estimate of where investors think interest rates will be in the next few months and years. There is a clear downwards trend, with interest rates generally predicted to drop over the coming three years. We can view these predictions by using bond market pricing: the yields on bonds of different maturities provide a good indication of what investors expect to happen next.
The chart shows that investors expect the European Central Bank – which cut interest rates first – to cut interest rates the most aggressively. Meanwhile, investors predict that the US central bank and the Bank of England will move similarly to one another, both in the near term, and over the coming three years. We disagree slightly with this view, and think that the UK could see more interest rate cuts than expected (though not as many as in Europe). In short, we think that the market is underappreciating how many times the Bank will cut rates over the next few years.
Scroll down the page to our section on bond markets to find out what this means for positioning in our investment strategies.
Earlier this year, we slightly increased our stock market positions to reflect our view that we were approaching the later stages of a period of recession, and seeing some signs of embryonic growth in regions outside the US. We achieved an increase in stock market positions by reducing our positions in a number of other market areas, most notably alternative asset types and debt in developing economies.
We favour the shares of larger businesses, as well as positions in healthcare, insurance and clean energy. With a few key exceptions, we currently prefer to limit the bulk of our stock market exposure to developed economies.
At the time of this update, we are 'neutral' when it comes to stock markets/shares. This means that we have not deviated for tactical reasons from our overall asset allocation framework - a way of dividing investments across different types of assets. As a result, our multi asset strategies currently hold a proportion of investments in stock markets which is consistent with our long-term average.
Our multi asset investment strategies currently hold a higher proportion of assets in ‘fixed income’ markets (like government bonds) versus our long-term average positions. Having been a rather uninteresting part of financial markets for quite some time, bond yields rose higher in 2023 than they had done for many years (and bond prices, which always move in the opposite direction to yields, fell). This presented what we perceived to be an attractive buying opportunity.
Building up our bond exposure over the past two years has meant not only increasing the proportion of bonds that our strategies hold, but also the maturity of these bonds, particularly UK government bonds. Adding longer-maturity bonds gives us a greater sensitivity to movements in expectations for interest rates.
Our suspicion that the Bank of England will cut rates by more than the market expects over the coming months and years is a key reason behind our current higher-than-usual position in UK government bonds, alongside the compelling valuations of these bonds. It also explains our comparatively lower exposure to US government bonds.
At the time of this update, we are slightly 'overweight' bond market investments. This means that we have deviated for tactical reasons from our overall asset allocation framework - a way of dividing investments across different types of assets. As a result, our multi asset strategies currently hold a relatively larger proportion of investments in bonds versus our long-term average.
The ‘alternative’ investment space covers a diverse range of assets outside of traditional bond and stock markets, from commercial property to specialist hedge funds. Because of their wide variety, it’s difficult to make sweeping statements about alternative assets, and our overall ‘underweight’ stance in this diverse area of the markets hides some specific preferences.
At present, we prefer assets which can drive financial returns, without being closely linked to mainstream financial markets. Among our positions in property investments, we have a preference for global assets over UK-based assets, believing that this allows us to access a much more diverse array of property, from data centres to telecoms towers. Other notable positions include a specialist hedge fund designed to protect against dramatic market falls.
At the time of this update, we are slightly 'underweight' alternative assets. This means that we have deviated for tactical reasons from our asset allocation framework - a way of dividing investments across different types of assets. As a result, our multi asset strategies currently hold a relatively smaller proportion of investments in alternative assets versus our long-term average.
If you’d like further information on how we divide investments in our strategies across different types of assets (i.e. our asset allocation framework, and our tactical deviations away from it), please contact us.