June 2024
Prospects for the world economy have improved and interest rates are about to fall. That’s a positive backdrop for stock markets in the near term.
Asset allocation: from soft-landing to no-landing
Not so long ago, the markets were convinced that the US would head into recession some time this year, dragging the rest of the world down with it. Now the most likely outcome is neither recession, nor even a soft landing. Rather, the highest probability scenario is that the economy continues to sail along steadily with only a modest short-lived deceleration (see Fig. 2).
Against this backdrop, we expect stocks to outperform fixed income, and hence remain overweight equities and neutral bonds. We remain underweight cash as the global monetary easing cycle gets under way, even if the US Federal Reserve looks likely to lag other developed market central banks.
There are, naturally risks to this benign view. US elections later this year could cause considerable turbulence, in light of the fact that Donald Trump is running neck-and-neck in the polls with incumbent Joe Biden. What’s more, some economists are even starting to worry about the US needing further rate hikes to mitigate fiscal largesse, while others think that an accidental hard landing is still possible. That’s worth bearing in mind given 80 per cent of assets are now trading above historical trend – risk appetite has been robust.
