Multiple pathways seen for global economy for the rest of 2024
We expect US growth to moderate, a modest rebound in Europe and a gradual recovery in China
THE global economy is poised for multiple growth pathways for the remainder of 2024. We see signs of stabilisation in major economies, and a mixed picture elsewhere.
We expect US growth to moderate somewhat in the second half, as spending and the labour market slow down. On the back of inflation data, including slowing wage growth, our central scenario is for a first Federal Reserve cut in September, followed by a second 25 basis point cut in December.
In Europe, including in Germany, a modest recovery seems to be underway. In Asia, the Chinese authorities unveiled new efforts to help the embattled property sector in May, but we believe any recovery in housing will be gradual and shallow. Increasing trade friction with the West will also have an impact on China’s prospects.
Equity pick-up outside the US
A strong economy and the prospect of rate cuts continue to propel US equity indexes forward – but gains remain concentrated in a few mega-cap tech stocks until very recently, when a rotation seemed to take place. Valuations are often frothy.
While neutral overall, we view equities in Europe with interest. European economies have skirted recession; manufacturing is showing signs of improving; and interest rates fell sooner than in the US. The earnings outlook for euro small caps has been improving noticeably.
On Japan’s Topix equity index, earnings growth remains robust for 2024. While valuations for constituent stocks have increased after the market rally, their forward price-to-earning multiples are still well below their long-term average.
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In Asia, we are cautiously optimistic about the Chinese market in the near term as we await follow-ups on policy implementation and additional funding support on the property sector. There may be tactical opportunities in China-related stocks.
Taiwan, the most tech-heavy market in Asia, saw a surge in semiconductor names year to date, while Korea could play some catch-up for the rest of the year. The Asian technology hardware sector benefited from lower US Treasury yields and sustained AI-related sectors could rise further in 2024.
We remain structurally positive on India as we believe that the government’s policy direction is likely to remain largely unchanged. We remain cautious about Asean in the near term due to muted earnings outlook and a strong US dollar, at least until the Fed starts its rate cut cycle.
More upbeat on US cash
Still-high yields make extending duration in high-quality government bonds an attractive proposition ahead of probable rate cuts in the US and Europe.
In corporate bonds, while the “soft landing” narrative has been pushing spreads down to historic lows, we remain underweight non-investment-grade bonds as lower-quality companies struggle to refinance debt at higher rates. We have also turned more cautious on investment-grade corporate bonds in the US because of the delay to rate cuts and the extreme tightness of corporate spreads, while we continue to see select opportunities in high-quality credits.
The relative attractiveness of cash and cash-like instruments in the US remains high, with investors being rewarded to wait to seize better opportunities down the line.
Key investment themes
With uncertainty ahead of the US election, ongoing geopolitical tensions in some parts of the world and high-for-longer rates, the Goldilocks market is being challenged with the new normal of higher and potentially more volatile bond yields, tight credit spreads at record levels and the continued US outperformance concentrated on a handful of global tech leaders.
We believe active management remains paramount as always, and find value in three investment themes for the second half of 2024: engaging in the resurgence of mergers and acquisitions (M&A); capitalising on the promise of artificial intelligence (AI); and structural opportunities linked to electrification, decarbonisation and digitalisation.
M&A resurgence: On M&A, megadeals are back after two years of subdued activity. The value of global transactions is up by over 20 per cent so far in 2024. Rising equity values and hopes for interest rate cuts have been encouraging buyers to proceed with acquisition strategies. So far, most of the activity has taken place in the US, in the financial and technology sectors.
Transaction sizes are large, making the market confident that deals are strategic in nature for acquirers and not only tactical. We expect M&A transactions to continue to progress and to extend geographically on the back of easing of costs and the ability of acquirers to use the high valuations of their stocks to fund future acquisitions.
The promise of AI: The past five years have seen considerable leaps in machine-learning AI models that can train computers to carry out complex tasks.
These models can be used to generate text, image and music, leading to “generative AI” (gen AI). AI has rapidly become accessible to individuals and corporations, progressively disrupting many parts of the economy.
We are optimistic about the way forward, as we believe gen AI will improve productivity and lead to increased innovation. Interest and investments are growing fast among data-intensive firms across the spectrum. One particular area is healthcare, with medtech and life science companies among those most likely to benefit from advances in AI in the near term.
Gen AI will also contribute to the innovation that biopharma and managed-care companies need to stay competitive. Data-intensive firms such as insurers and financial-service providers are also shaping up as the earliest adopters and beneficiaries of gen AI. The substantial power needs of this technology mean that we are positive on the energy infrastructure and individual energy providers.
As for the tech sector itself, we think companies that are able to monetise proprietary (as opposed to open-use) intellectual property in areas such as semiconductors, vertical software (designed for niche industries and applications) and the vertical cloud, stand to advance the most in the near term.
From consumers to producers. While the outlook for consumer spending is hazy in some major economies, there are interesting pockets of opportunity in the industrial sector linked to long-term structural drivers such as electrification, decarbonisation and digitalisation. To these can be added the benefits of gen AI such as better management of costs and the product cycle.
We favour industrial companies that are contributing to a more sustainable world – not just for ethical reasons, but also because the substantial investments being made in sustainability are leading to robust growth. The Covid pandemic as well as the need to address climate change and build more robust supply chains are likely to drive greater capital expenditures that will benefit well-placed manufacturers. As always, stock selection is important.
The writer is chief Asia strategist and head of Asia research, Pictet Wealth Management
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