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Money matters

Mid-year Investment Outlook 2024

Section 1

Review of the year so far

It’s been a remarkable last six months for financial markets, which have managed to hold their ground in the face of some challenging conditions. Fears of a recession are nothing but a memory, and markets are now waiting for central bank decisions on when interest rates will be slashed rather than hiked.

The main focus for investors right now is whether inflation will continue to edge lower – and if interest rates will stay higher for longer. Regardless, the market mood is positive and our anticipation of this healthy growth environment has paid off regarding our fund performance this year. 

Economic resilience

Many developed economies are showing they have a firm grasp of slowing the pace of rising prices while maintaining robust consumer demand. When interest rates go up, everyday people typically have less spending money due to their outgoings – such as mortgage payments – going up. Instead, companies have beaten expectations with their earnings announcements so far this year. 

US shows promise

The US has been a standout performer in 2024. Major US stock indices have reached record highs, bolstered by big technology firms doing well off the back of the increasing popularity of artificial intelligence. But in addition to this, we’ve seen solid financial performance from other companies and sectors as well.

More broadly, the world’s largest economy has held up well too, maintaining relatively solid growth. Alongside good consumer spending and high employment, another key reason behind this was that the average Joe in the US had taken advantage of 30-year mortgages. This meant they locked in rates at pre-pandemic levels, so were largely protected against the interest rate rises seen over the past couple of years.

Europe benefits from falling energy costs

Meanwhile, Europe has benefited from falling energy costs (now lower than before the Russian invasion of Ukraine) and a significant decouple away from traditional energy sources to renewable alternatives, according to Wood Mackenzie. Similar improvements have been seen across other services sectors in the region. 

Prices simmer

Supply chain bottlenecks, labour shortages and price shocks have gradually been phased out of the global ecosystem. As a result, inflation has been on a downward trajectory since its most recent peak in summer 2022. Most things within financial markets are never straightforward, and managing rising prices is no different.

While there have been a couple of bumps along the way, inflation is approaching central banks’ preferred levels at 2% – where prices are still going up year-on-year but not by as much. We’re now in the territory where central banks could consider monetary easing – lowering interest rates – if the economy was to suffer or when inflation stabilises.

The European Central Bank cut interest rates by 0.25% in June – one of the first to do so this year. We’re yet to see any interest rate cuts from the US Federal Reserve or the Bank of England, but markets anticipate at least one from each by the year’s end. 

Section 2

Strategy and projections for the year ahead

Financial markets have performed well so far this year and we’re happy that our funds have been well-positioned to capture much of this rally. A reason for this was choosing to take risks where we felt appropriate. Coming into the year, we believed recession fears were overzealous and the global economy was actually in growth mode.

This decision was one part of our wider investment strategy: Anchor and Cycle.

Anchor – our long-term vision, prioritising our big asset allocations to be well-positioned for this time horizon.

Cycle – a focus on what’s impacting markets in the more immediate future, taking into consideration where we are in the business cycle, current market mood and updated central bank policies.

Using these two scopes, our philosophy is three-fold:

We take risks where best rewarded, using our framework to calculate what successful outcomes have the highest probabilities.

Diversify our investments to try to pre-emptively manage losses within acceptable limits.

Markets can shift quickly, particularly during stressed conditions. We look to take advantage of these sudden opportunities.

Our asset allocation

As part of our Cycle strategy, we’ve been overweight in equities. We expect a growing economy will continue to bolster corporate earnings and raise share prices with a preference for the US. This contrasts with some of the wider market, which has been more focused on the unattractiveness of valuations. This typically isn’t the best metric to analyse for the medium term.

Our fixed income allocation has been more linked to our Anchor process. We’ve had a favouritism towards the ‘more risky’  high-yield corporate bonds, as they’ve been offering attractive risk adjusted returns. A high-yield bond is corporate debt. Because they are linked to companies, they usually move in the same direction as a stock.

Government and investment-grade corporate bonds, on the other hand, have not held up as well in light of their surging yields (as yields go up, prices go down). 

Cautiously optimistic outlook

We maintain our cautiously optimistic outlook for the remainder of 2024. There are signs the global economy will continue to grow and corporate earnings will trend upwards. We’re still being cautious, however, because a number of risks lie ahead that we’ll monitor closely, such as geopolitical tensions and election uncertainty.

Where inflation will go for the next six months also isn’t a given. Despite it trending down, it’s been proving stickier than hoped recently and led much of the market to believe we’ll see interest rates higher for longer. If any issues persist, then we could never rule out the possibility we’ll see another hike before we see a cut. 

Section 3

Impact of political elections

Some of the largest economies in the world are either amid or awaiting a political election this year. One of the most influential will be the presidential election in the US. The result could have the potential to redefine America’s relationship with influential institutions such as the United Nations, NATO and the International Monetary Fund. 

Economic impact of political elections

Elections typically have minimal impact on the performances of stock markets over the long term. Since 1928, the S&P 500 has an average return of 11.5% in non-election years versus 11% in election years.

While political elections are important, they’re more often than not overshadowed by the primary economic drivers such as interest rates, inflation and corporate earnings.

Democrats or Republicans?

The US is a two-party electoral system. This means only two parties dominate all levels of political elections: Democrats and Republicans. There’s no evidence to suggest markets outperform if one or the other has the political control.

Instead, our research found markets respond positively to a divided government, where both parties share power across the White House and Congress. This usually eases the minds of investors about any radical or sweeping political changes.

While we don’t expect any prolonged volatility off the back of political updates, there could be some knee-jerk reactions along the way as news gets released about the elections. However, these should only be brief before attention returns to the fundamentals. 

Growing interest in green investing

Something else worth considering when discussing the political impact on investing is the opinion of the term environment, social and governance (ESG). Despite disagreements, green investments are growing in the US.

A large contributor to this is the result of the Inflation Reduction Act, which pledges to direct nearly $400bn of federal funding into clean energy and mitigate climate change. Both US parties are in support of the act, but it’s Republican-held states that will be the largest beneficiaries. 

Section 4

US earnings

Alongside inflation and interest rates, we’ve previously mentioned corporate earnings as being a fundamental consideration within our investment process. To explain further what this is, typically each quarter companies release how their businesses have performed for the previous three months – along with how they expect to do in the near future. 

US technology

In 2023, company earnings were persistently flat throughout the year. Although it’s a more positive story so far in 2024, with a return to growth expectation of 9%. This can be attributed significantly to just a handful of technology giants.

According to Ned Davis Research, this small group of tech stocks is expected to grow S&P 500 earnings by 40%, with the remaining constituents making up just 1%.

The industry has recognised a small group of mega-cap technology stocks for their size and outperformance so far this year, naming them the ‘Magnificent 7’. Made up of Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia and Tesla, the group has outperformed the rest of the US market by roughly 14% this year up to June.

There’s been an impressive uptick in demand for these mega-cap tech stocks’ services and products this year. What’s allowed them to expand their businesses comfortably is the fact they don’t have to rely on high interest rate loans to finance this growth as they tend to hold large cash positions – meaning they get to keep more of the profits. 

Artificial intelligence

The buzz phrase of the year has been artificial intelligence (AI). Technology giants are either getting investors excited about the future of their businesses because of the massive surge in adopting AI or they’ve optimised their businesses by implementing it both quickly and efficiently. 

Market dominance

Forecasts predict the earnings growth for some of these tech stocks will gradually slow while the rest of the US market will accelerate. The end result will be that the narrow leadership of the US market will widen, heightened by the AI boom.

Unsurprisingly, communications and technology have been the S&P 500’s top performing sectors so far this year – returning 21.3% and 19.8% up to the end of May, respectively. What has been a surprise is utilities coming third, with the sector benefiting from the growing data centre industry across the US – yet another beneficiary of the AI boom. 

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