Summary with Investment Specialist Ritu Vohora

Transcript

As we head into the second half of 2024, we’re in a different market environment than expected, with a rate environment that has shifted toward “higher for longer.” Expectations for rate cuts have been pushed out further, with far fewer anticipated, and markets have repriced accordingly.

Most developed market central banks face a delicate balance between cutting too soon and fueling an acceleration in inflation or keeping rates higher for longer and causing a slowdown. In the United States, we expect the Fed will keep rates steady for longer in order to bring inflation sustainably lower. In other regions, including the UK and Europe, the path is clearer for cuts before year-end. We expect Japan will gradually continue tightening too.

Monetary policy will have investment implications for investors, as we move from recession risk to inflation risk. Sticky inflation remains a threat and could inflect higher as global growth broadens. Election cycles also put upward pressure on inflation, and we’re mindful of an escalation in geopolitical issues. We have overweight positions in real assets and inflation protected government debt as an inflation hedge.

Within fixed income, we have a preference for short duration bonds. And while credit spreads are tight, all-in yields look attractive, with the potential for price appreciation if yields move lower—we are overweight high yield and emerging market debt.

The Magnificent Seven tech stocks drove the bulk of gains in 2023. We believe generative AI will create long-term winners, but stock selection will be key, as performance of the group continues to fragment. Furthermore, its impact on power and the industrial complex is creating opportunities for investors.

We anticipate a continued broadening of markets and think it is prudent for investors to diversify into areas that have valuation support and robust fundamentals, such as value stocks. More broadly, we continue to favor Japan and see select opportunities in emerging markets such as South Korea and Vietnam.

An active approach is key to navigating these shifting market conditions.