Monthly Investment Outlook – May 2024

 

 

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In April, investors endured a broad-based decline in the equity and bond markets. Investors have had to face the reality that three to six rate cuts by the Fed was overly optimistic, and they needed to recalibrate their forecasts. Slower GDP growth and nagging inflation may further delay the Fed’s pivot until later in the year. The inflation dragon has not been tamed and the U.S. may be enduring a prolonged period of sticky CPIs. U.S. GDP expanded at a modest 1.6% seasonally adjusted rate in the first quarter versus a revised 3.4% growth in the previous quarter.

 

More troublesome was the jump in the Fed’s preferred core inflation gauge (personal consumption expenditure index), which rose 0.3% in March and 2.8% year-over-year. Meanwhile, inflation-adjusted consumer spending gained 0.5% more than forecast, which represented the largest increase for this year. With borrowing costs in the U.S. remaining near a 23-year high, GDP growth could continue to moderate at a time when prices are still rising.

 

Although the resilience of the U.S. economy may avoid a recession, a period of possible stagflation could increase market volatility over the next several quarters. Europe on the contrary shows a clearer picture vs US allowing the ECB to start cutting earlier. Here as well we see slower rate cuts and also highlight that divergences in Central Bank actions will require FX to be closely monitored. On the positive side equity earnings through April have been encouraging, with roughly two-thirds of US large cap companies beating consensus EPS estimates by an average of 9%.

 

We believe that earnings growth and micro factors are ultimately the key drivers of equity prices despite heightened macro uncertainty, evidenced by many investors assigning large valuation premiums to companies with quality attributes and strong balance sheets.

 

 

“ Although the resilience of the U.S. economy may avoid a recession, a period of possible stagflation could increase market volatility over the next several quarters. Europe on the contrary shows a clearer picture vs US allowing the ECB to start cutting earlier. ”

STEFANO TORTI – MONTHLY OUTLOOK

 

 

 

 

 

 

Our sub-asset class views

 

		–		=		+
EQUITIES					GEGE					The bull market took a pause in April, but no technical break of the trend. The soft landing thesis remains intact. Geopolital risks are for the time being ignored.
US				GGGG						Robust earnings and expectations of rate cuts continue to drive the market. Risks of a slowdown do not appear to be priced in.
UK				GGGG						Positive macro surprises have boosted sentiment, with expectations that rates will fall later in 2024. Cheap valuations could see upside from increasing M&A activity.
Eurozone				GGGG						After stagnating for a year economic activity seems to be picking up. Value and cyclical bias of the market could revise EPS higher.
Switzerland				GEGE	GEGE					Quality bias and low leverage make Swiss equities an attractive long term allocation.
EM				GGGG						EM growth outlook remains moderately attractive, with disinflation as an additional support. Valuations are generally attractive but dispersion among countries is high.
Japan				GEGE	GEGE					Robust earnings outlook and improving corporate governance are a medium term support. Cyclical bias is however a long term risk if the global economy stalls.
FIXED INCOME				GEGE	GEGE					Front end yields make short-dated investment grade bonds attractive, but it is also time to take duration to minimise reinvestment risk long term.
Sovereign Bonds				GGGG						Euro rates are the most attractive in the near term due to recent inflation dynamics, however US treasuries can provide the most upside in case of an economic slowdown.
Corporate I.Grade Bonds				GEGE	GEGE					Selective opportunities in global corporate bonds, particularly in short term and securitized credit.
High Yield Bonds			RRRR	RRRR						Valuations are expensive with spreads falling sharply in the last months. The market fully prices a soft landing.
E.M. Bonds				GGGG						EM credit spreads can benefit in case the FED finally cuts rates. Spreads are generally tight but further compression is possible.
ALTERNATIVES				GGGG						We like holdings that are genuinely uncorrelated to the main asset classes. AAAAAAAAAAAA
Precious Metals				GGGG						Gold price is short term overbought but long term picture is intact.
Hedge Funds				GGGG		A				We aim to create a blend of alternative strategies that offer different return profiles and risk premia to bonds and stocks.
Oil/Commods				GGGG						Commodities are attractive for the long term, due to the demands of net zero, but oil looks to have peaked in the near term as supply has risen.

 

 

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CURRENCIES								Recent US economic strength will probably limit the pace of rate cuts and hence be more supportive for the USD.
U.S. Dollar (DXY)				GGGG				The USD strength could continue in the short run due to US growth premium.
Sterling (GBP)				GGGG				BoE could cut rates soon but nominal rates are still very attractive.
Euro (EUR)			RRRR	RRRR				Economic activity is picking up but we expect the ECB to cut rates in June and September.
Japanese Yen (JPY)				GEGE	GEGE			Fundamentally attractive but BoJ intervention are complicating the picture and adding to volatility.
Swiss Franc (CHF)			RRRR	RRRR				CHF looks expensive on all metrics, and inflation is now below the SNB target.
EM				GEGE	GEGE			Economic activity is picking up and inflation is under control in most countries.