Amidst global political shifts and a delicate economic landscape, how does the future of financial markets look? We believe politics may bring volatility and the global economy remains fragile, with stronger growth in some areas balanced by weakening in the US.
However, more than 25 central banks cut rates in 2024 (excluding the US Federal Reserve - Fed), raising hopes about recovery. As a result, a lot of that is priced into assets. We reduce investment grade (Overweight) and high yield (to zero) within our Model Asset Allocation, while boosting government bonds and real estate (both Overweight). Regionally, we prefer European and emerging market (EM) assets.
Questions persist about growth outlook, inflation stickiness, central bank easing timing, and market effects of election surprises. After seeking opportunities, we adopt a barbell adjustment, cutting credit and boosting government bonds (defensive) and real estate (riskier, lagging).
Most central banks will continue cutting rates; the Fed and Bank of England (BOE) may join. By mid-2025, major Western central banks may cut rates by 100-150 basis points (from peaks). Much is priced into long-end yield curves, limiting downside in 10-year yields. Yield curve steepening [i]may result from falling short rates; we favour duration assets more than three months ago, post-long yield rise. Election surprises may have limited durable impact, adding caution.
We expect dollar weakening (especially vs. yen) as Fed easing exceeds other central banks' (in our view). This could help gold, easing high levels (we find gold costly), also aiding commodities and EM assets.
