Earlier in August, global equity markets tumbled due to disappointing US macro data and the unwinding of the Yen carry trade. However, as we expect elevated market volatility until the US Presidential election in November, it may be premature to consider buying the dip.
Key takeaways
Macroeconomy
Inflation is expected to decline to 2.5% by the end of the year, potentially prompting the Federal Reserve to cut interest rates.
Equities
We maintain our rating of 3/5 on equities and we continue to hold equity carry strategies.
Fixed income
Our strategy continues to favour investment-grade bonds over government bonds, while maintaining a duration of approximately three years.
Gold
Following the yellow metal’s record high of USD 2,488 per ounce, we remain optimistic about its medium-term prospects.
Editorial
Risks mount on the horizon
Weak US labour data and the unwinding of Japanese yen carry trades triggered a market sell-off, resulting in the rise of volatility earlier this month. However, it might be too soon to buy the dip, as risks are mounting on the horizon. Following the equity rally in the first half of the year marked by unusually low volatility, we might encounter market instability that could persist until the US presidential election in November. In this context, we continue to hold equity carry strategies that should partially absorb any downside.
Amid the current increasing growth scare, we do not expect any recession this year that would likely lead to a prolonged market downturn. Instead, we anticipate US growth ranging from 1.5% to 2%, contingent on the outcome of the presidential election.
In Asia, due to near-term uncertainties, we tactically reduced our conviction rating on Japan from 4 to 3 out of 5 after an increase dating back to November 2023. Additionally, China’s third plenum did not deliver concrete measures to invigorate the struggling economy, leading us to remain cautious on the country while continuing to favour India within emerging markets.
Looking ahead to the Jackson Hole symposium on the last weekend of August, the Federal Reserve is expected to provide further clarity about the timing and scope of its forthcoming rate-cutting cycle. However, challenges are looming due to the impending US election and mounting geopolitical risks, such as conflicts involving Israel and Iran, Russia and Ukraine, and potentially Taiwan, along with a weakening US dollar.
Strategy
Pivoting to a risk management focus
Since June, we have been counselling a two-pronged approach in the run-up to the election window. On the one hand, it consists of maintaining an equity exposure to capitalise on both an election-related tailwind and of a broadening of market performance beyond the technology leaders of the first half of the year; on the other, entering autumn, there should be a focus on risk management as debt sustainability concerns start to emerge.
Indeed, with election-related tailwinds having produced the strongest election year performance since WWII and the start of a rotation away from technology leadership, investors should focus on the risk management component as summer moves into autumn.
In particular, disappointment in China’s policy response to growing deflationary pressures means our tactical trade against a structural Chinese equity bear market backdrop did not meet our expectations. Instead, our long-cycle focus on the persistence of Indian equities’ earnings power should be the focus for global and emerging market investors.
Similarly, the ongoing reform- and restructuring-driven earnings growth continues to provide a foundation for sustained Japanese corporate earnings growth. However, in light of the recent soft US economic data and the dramatic strengthening of the Japanese yen, new investors can likely tactically seek better entry points once Japanese earnings expectations adjust to the new backdrop.
As we enter autumn, investors will also be faced with budgets from new governments in the UK and France, as well as greater clarity on the US election outcome. Given debt burdens in the US, the UK, and France, 2022-style UK risks may loom on the horizon for sovereign bond investors.
As a result, credit and income-focused strategies in fixed income are favoured, avoiding meaningful interest rate risks that we expect lie ahead. Moreover, gold has once again established itself as an anchor for investors’ long-term wealth preservation. Looking ahead, the yellow metal will benefit from growing debt sustainability concerns, as well as from the prospect of the next chapter in the US-China “strategic competition” that may come in 2025.
In essence, we expect that this two-pronged approach going into year-end should help investors as the global economy and markets face greater two- way risks than those seen at any time over the past 18 months.
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