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Markets and macro insights with Bernard Swords, Chief Investment Officer
How has the year evolved relative to our outlook at the beginning of the year?
- The good news this year is that the world economy has performed better than we expected. At the start of the year, we thought that we would have sub-trend global growth in 2024 and 2025. But as the year has progressed, we have seen continual upgrades to the global growth forecast for both years and currently a trend growth rate (just above 3%) is expected.
- Much of the extra momentum has come from the US where consumption growth has been faster than expected and fiscal policy has been looser than forecast. The rest of the world is performing close to what we thought.
- We expected inflation to decelerate in the developed world but that the journey would become ‘bumpy’. This has proven to be the case with inflation proving particularly sticky in the US. This has led to more realistic interest rate expectations in the euro area and the US.
- At the start of the year, interest rates were expected to be cut by 1.75% by the end of 2024 in both regions. We believed that this was too aggressive due to our view of the pathway for inflation. That has altered a lot; the expectation now is for 25bps to 50bps cuts in both regions – a view we believe is realistic.
- Political events were a well-flagged feature of 2024. With many countries going to the polls globally, we thought the impact of most results would be felt in local asset markets rather than affecting global markets. The only one we felt that would have global implications was the US elections.
- As it turned out, the European Parliament election has thrown up unexpected implications with a snap election called in France. We are in the middle of this election campaign, so the full implications we will not know for nearly two weeks.
- This has led to increased uncertainty for the euro area, and thus a slight de-rating of region’s equity market. That said, it has been helpful for the local bond market as investors switch to the safe haven asset. Whatever the result in the election, fiscal policy in France, and thus for the rest of the region, looks like it will be the main focus of attention.
- Meanwhile, equity markets are having another storming year, the world index is up almost 15% in euro terms so far this year, well ahead of what we expected.
- However, we would point out that this performance is quite narrow. Of the 11 sector groupings, only two (IT and Communication Services) have outperformed the world index and one of them (Property) is down.
- The equal weighted world index, a better measure of broad equity performance, is much more subdued, up just over 6% so far this year.
- The AI theme has been the big driving force behind this performance gap and the sector rankings. As we expected, the US equity market has led this year, owing to high exposure to AI, ‘new economy’ themes and better performance from the local economy. Indeed, the US region is the only one to outperform the world index.
- Another reason for the strong equity performance is that earnings have proved much more resilient than we expected. We felt at the start of the year that growth forecasts were too high and that they would have to adjust downwards.
- Midway through the year, these forecast growth rates are increasing as corporate performance surprised to the upside. Part of this is due to the exceptional levels of sales growth in the IT sector but the stronger US economy is lifting demand in a number of sectors. Double digit earnings growth in 2024 does look achievable now. However, double digit again in 2025 still looks demanding.
What is our outlook for the rest of the year?
- There are indications that some of the trends in the first half of the year may change in H2.
- As we approach the midpoint of the year, the global economy does appear to be losing momentum. The recent data from the US is indicating some slowing in activity, in particular for the consumer. In the rest of the world, the data is better than at the start of the year, but not materially so.
- On the other hand, inflation data has been getting a bit better in the developed world, so the interest rate outlook could improve in the second half of the year.
- For equity markets once the growth data does not weaken significantly, given the high levels of employment around the world that seems a reasonable assumption, then further progress can be made if we get an improved interest rate outlook.
- Political events will weigh on markets as we approach the US elections purely due to uncertainty – and so, much of the sustainable move will probably happen towards the end of the year.
- Looking at our sector strategy, we continue to focus on the structural growth themes. We are in the late stages of a cycle. As such, economic growth rates are not going to spike above trend, so it will not be a case of ‘a rising tide lifting all boats’.
The week ahead: what to watch out for
We have a busy week ahead with the latest euro area inflation reports (CPI and PPI), the US monthly labour report (non-Farm Payrolls) and the main US business sentiment surveys (the ISMs). We will also hear from central banks: the European Central Bank starts its annual conference in Sintra, and the Federal Reserve will release the minutes of the last FOMC (the interest rate setting committee) meeting. On the political front, we will have the result of the first round of voting in the French Assembly election and the result of the British general election.
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