Investment Team Handelsbanken Wealth & Asset Management
09 Oct 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?
Inflation story moving to the back pages
Since the COVID-19 crisis, inflation updates (and subsequent interest rate hikes) have dominated economic news cycles. Pricing pressures in the UK peaked at 11.1% exactly two years ago, in October 2022, and it feels increasingly that the war on inflation has largely been won. While it’s impossible to say for certain that we’re out of the woods, we can say with confidence that recent inflation data has been largely in-line with (or even lower than) general expectations.
Importantly, in major developed regions like the UK, US and Europe, inflation is increasingly moving towards the target level for central banks: 2%. In fact, in some cases, it’s already there. This has important implications for the central bank committee members making critical decisions about where to set interest rates. This means that there are also important implications for the precise mix and proportion of assets we hold within our multi asset strategies.
Bond markets are enjoying this environment
Interest rates appear to have peaked, and are now actively beginning to fall back again. This is good news for government bond markets, which have struggled in the interest rate rising backdrop which has characterised the last two years or so.
It’s still our view that – on the whole – investors are underestimating the extent to which the Bank of England will cut interest rates over the next 12-18 months. Where we disagree with the market like this, we see opportunities to position ourselves for potential financial returns. You can find out more about our views on bonds by scrolling further down the page (‘What do we think about bond markets?’).
One eye on the US election
November’s impending US election remains one to watch. From our perspective, a Kamala Harris win, but without a major majority, could be a benign outcome. This sidesteps the potentially leftfield policies of a second Trump presidency, but wouldn’t allow the government enough leeway to make any sweeping changes that could destabilise financial markets.
As we write this, the election remains a few weeks away – a long time in politics, but we’ll watch closely as the situation evolves. If you’d like to know more about our views on political events, you might enjoy our Insight Counting down to the US presidential election, which was published earlier this summer.
Our chart of the month
Source: Bloomberg.
What does this chart tell us?
This bar chart shows the percentage of the time that the value of the US S&P 500 Index – which represents the share prices of the largest 500 companies listed in the US – has risen in the second half of an election year. The third quarter of the year (July to September) is marked in dark blue; the fourth and final quarter (October to December) is shown in light blue.
Even in the year after an election, the average return for US shares is just over 6%. This data goes back almost a century, to 1928. And while past outcomes are never a truly reliable guide for future events, they can point to some interesting historical patterns. Put simply, financial markets have tended to look through election noise.
Scroll down the page to the sections below to find out what our market views mean for positioning in our investment strategies.
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 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, and we continue to believe the market is underappreciating how much the Bank of England in particular, will cut interest rates over the next 12-18 months.
At the time of this update, we are slightly 'overweight' bond market investments. 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 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 have a preference for 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.