Eased ECB policies will boost Europe's recovery. As US growth normalises, developed market economies should converge in the second half of the year, while recent regional market rallies have reinforced our confidence in the UK and Switzerland.
Key takeaways
Macroeconomy
Europe rebounds and improves growth prospects for developed countries.
Monetary policy
European central banks are more accommodating than the Federal Reserve.
Equities
In May, global equities recovered from weakness in April, with the MSCI World index rebounding +4.5% and the S&P 500 reaching an all-time high.
Fixed income
Considering elevated risks in long-duration bonds ahead of the US presidential election, we maintain our short-duration positioning of 3.2 years for a USD balanced portfolio, while maximising yields.
Editorial
Converging growth
European countries are finally rebounding from a period of stagnation. The recovery momentum is expected to gather pace in the coming months, driven by swifter easing of monetary policies by European central banks. Household confidence is on the rise, and consumption is picking up as purchasing power improves. Meanwhile, US growth projections are likely to normalise, leading to a convergence of developed market economies in the second half of the year.
The marked decline of inflation in Europe relative to the US implies that, after the surprise rate cut from the Swiss National Bank (SNB), the European Central Bank (ECB) and the Bank of England (BoE) are set to decouple their monetary policies from the Federal Reserve’s inclination towards a “higher-for-longer” stance. The ECB should begin its easing cycle in June, followed by the BoE in August after the general election in July. However, with growth expected to stabilise in 2025, terminal rates could remain at relatively high levels, reflecting a persistently challenging landscape.
The rebalancing of growth is reflected in the solid performances by European markets. Since the beginning of the year, market rallies regionally broadened, underpinning our convictions in the United Kingdom (UK) and Switzerland raised in April.
In the coming months, we will closely monitor the progress of the US presidential race. During non-recession periods, US election years have demonstrated positive investment returns for equity and credit investors.
Strategy
The 2024 US elections come into view
Investment returns during US presidential election years have been favourable for equity and credit investors outside recession years. This is consistent with our optimism on both asset classes amidst the current economic expansion.
The election landscape today favours former President Donald Trump, who leads incumbent President Joe Biden in recent polling. More importantly, however, Trump leads Biden in six of seven “battleground” states that either leading candidate will need to secure to win the White House. Recall both the 2016 and 2020 elections were decided by fewer than 100,000 votes in these states out of the over 136 million votes cast.
Taking into account historically significant polling errors in these states leaves open the possibility that these polls favouring President Trump are not only larger, but importantly outside the margin of error of the polls. Fortunately for Biden, since the March State of the Union address, these unfavourable polling gaps have begun to narrow.
Admittedly, the recent guilty verdicts delivered against Donald Trump by a New York court have the potential to tighten the former president’s lead, especially in key Midwestern battleground states, narrowing his own potential paths to victory while opening up avenues for his rival, President Biden, despite his poor presidential approval ratings.
Indeed, President Barack Obama’s recovery from low popularity and weak polling in 2011 to hold on to the White House in 2012 provides a potential campaign template for President Biden in the run-up to election day in November 2024. The Biden administration has already begun to deploy fiscal and legislative measures to mimic the Obama strategy. Though unclear whether they will be successful, for investors, these actions should be a tailwind to growth and, looking further afield, potentially to inflationary pressure in 2025.
Being overlooked in the 2024 US presidential campaigns are US fiscal challenges which will constrain the eventual winner of the coming election. The US debt ceiling is set to cap bond issuance once again in January 2025, forcing difficult revenue and spending trade-offs on the new US leader in his first days in office, triggering, we expect, potential interest rate, equity and currency market volatility.
Therefore, with less than six months until the US presidential election, investors should position themselves to capitalise on the tailwinds to returns in equity and credit in the run-up to the election and then, entering autumn, focus on managing risk and pivoting to active sector, stock and currency selection as the prospective winner becomes clear moving into 2025. Gold and inflation-linked bonds should offer attractive protection against potential volatility around the transition into 2025.
