Chapters
Market observations
Central banks navigate diverse paths
Iain Cunningham – Head of Multi-Asset Growth
Don’t breathe out yet
In the US, we believe monetary policy is tight and will continue to progressively feed into the economy through corporate and household refinancings, as they take place. Evidence of this continues to emerge with a broad-based moderation of economic activity in the last few months. While the US Federal Reserve (Fed) has backed away from rate cuts in recent quarters, the evolution of data releases is likely to allow the Bank to move towards cuts later this year, in our view. At the same time, fiscal policy in the US has remained loose and continues to support economic growth, which provides some risk to the US inflation outlook. This combination of prospective monetary policy loosening, ongoing fiscal support and improvement in some of the more rate-sensitive areas of the economy leads to our central scenario, which is for a soft landing in the US. In saying this, the risk of a recession remains elevated at present as past policy tightening continues to feed through.
Figure 1: US PMIs
Figure 2: US inflation
Source: Ninety One, June 2024.
Euro inflation moderation
In Europe, monetary policy is tight and the lags are shorter than in the US due to less pandemic stimulus, higher levels of floating rate debt and notably less fiscal support. Growth indicators remain weak despite some modest signs of improvement from a low base. We expect eurozone inflation to continue to moderate as energy price pressures abate. We see an elevated risk of a deflationary period in the eurozone and believe that the European Central Bank’s (ECB) easing cycle will be more pronounced than that of the Fed.
Figure 3: Euro PMIs
Figure 4: Euro inflation
Source: Ninety One, June 2024.
China’s recovery remains bumpy
In China, policy appears loose, albeit without material easing taking place. Easing measures are, however, becoming progressively more forceful, with additional fiscal stimulus being implemented and strong efforts to clear excess housing inventory. This is being supported by funding conversions through the People’s Bank of China (PBoC) into social housing. We expect policymakers to do what it takes to ensure that a sustained recovery takes hold. Growth metrics are mixed, and the recovery will be bumpy. Inflation remains weak but base effects should begin to provide more support on a forward-looking basis. We continue to believe that the Chinese economy will experience a more benign outcome than the bearish consensus suggests.
Figure 5: China PMIs
Figure 6: China inflation
Source: Ninety One, June 2024.
Looking ahead
Our central investment roadmap, as discussed above, leaves us more positive on the prospects for risk assets, particularly in Asia and the US. In fixed income, portfolio duration declined through the first half of this year post a strong rally in government bonds at the end of last year and due to an increased probability of a US soft landing. However, we maintain an overweight to defensive duration, particularly in Europe. In currency, we maintain a preference for the US dollar versus European and Asian currencies, as a diversifying portfolio position, given positive carry dynamics and our expectation that easing in these regions will be more pronounced than in the US.
General risks. The value of investments, and any income generated from them, can fall as well as rise. Where charges are taken from capital, this may constrain future growth. Past performance is not a reliable indicator of future results. If any currency differs from the investor’s home currency, returns may increase or decrease as a result of currency fluctuations. Investment objectives and performance targets are subject to change and may not necessarily be achieved, losses may be made. Environmental, social or governance related risk events or factors, if they occur, could cause a negative impact on the value of investments.
Specific risks. Currency exchange: Changes in the relative values of different currencies may adversely affect the value of investments and any related income. Emerging market (inc. China): These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems. Commodity related investment: Commodity prices can be extremely volatile and significant losses may be made. Default: There is a risk that the issuers of fixed income investments (e.g. bonds) may not be able to meet interest payments nor repay the money they have borrowed. The worse the credit quality of the issuer, the greater the risk of default and therefore investment loss. Equity investment: The value of equities (e.g. shares) and equity-related investments may vary according to company profits and future prospects as well as more general market factors. In the event of a company default (e.g. insolvency), the owners of their equity rank last in terms of any financial payment from that company.
