As we look towards the second half of 2024, can we expect a repeat of the first half of the year and how should investors be positioned for it?
For information purposes only. The views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.
If we start off by looking at what happened in the first half, US equity markets were driven higher by a small group of tech megacap stocks, and this fed the myth that the only game in town was US tech stocks, for example, the NASDAQ.
The graph below tells a more nuanced story.
US tech stocks were not the only story in town
Source: SPX Index (S&P 500 Index) and Bloomberg Finance 29.12.23 – 30.06.24. Rebased to 100 as of 29.12.23. Past performance is not a reliable indicator of future returns.
The S&P 500 Index did indeed materially outperform the equally-weighted version of the S&P 500, while the NASDAQ Index outperformed both. However, the Nikkei 225 Index kept up with the NASDAQ, and in fact marginally outperformed it in local currency terms.
So, holding US tech stocks was not the only way to perform well, despite the common belief. In short, it has been possible to be diversified geographically and perform well.
Elsewhere, government bond markets struggled as investors started to accept that US interest rate cuts would be much more gradual and, indeed, that our base case of higher for longer would be more likely.
At the beginning of the year, markets were pricing in six cuts in US rates for 2024, they are now pricing in less than two cuts, which seems more reasonable.
Turning to currencies, it is this same belief that US rates will be higher for longer that has played its part in driving the main story in currency markets, i.e. the material weakness of the Japanese yen, especially vs the US dollar.
The other part of that story is that Japanese rates remain close to zero due to the weak state of the Japanese economy, particularly the consumer.
In terms of commodities, energy and gold performed well in part due to elevated geopolitical risk, though agricultural commodities generally performed poorly.
Taking those points in turn, and looking forward, we would be reluctant to call the end of the tech rally. Our experience shows that most trends go on for longer than investors think.
However, as night follows day, there will some sort of correction at some point, be it just a breather, or something more serious.
So, as in the first half, having a broad exposure to tech stocks that are doing well but diversifying beyond that, so as to avoid concentration risk, seems a sensible way forward.
Looking to government bonds, the key driver for an extended period has been the inflation outlook and there is an argument to be made for short-term disinflationary pressures remaining in place.
In the medium term we believe that the powerful structural forces of de-globalisation, increased conflict and reduced fiscal discipline will keep inflation at uncomfortable levels for central banks.
Interestingly, election risk has been having a negative impact on government bond yields of late. For example, better than expected results for the National Rally in France, and also the recent increased likelihood of a Trump win, and its perceived impact on looser fiscal policy.
In general, therefore, it makes sense to remain pretty short duration in bonds, as the yield there is attractive enough and anyway the duration hasn’t helped diversify equity exposure over more recent years.
This takes us to commodities, an asset class which has diversified equity risk pretty well over this more recent inflationary period, particularly energy, and we would expect this to continue.
Turning to currencies, intervention to deny economic fundamentals, in this case the interest rate differential between the US and Japan, has a limited success historically.
Either way, from a portfolio construction perspective, experience has shown us not to allow too much currency risk in portfolios, as speculative as currencies are, and that includes to the Japanese yen.
Thinking particularly about the US, it might be that the focus moves away from inflation data points to polling data points, especially when thinking about what drives the US Treasury yield.
In part as the Fed will be sensitive to not appearing too political ahead of the election, and so will be more likely to not act the closer it gets to election day, and in part because this election will likely be as noisy as any other, so markets will be drawn to it.
That said, we generally consider political risk as a short-term noise phenomenon, as fundamental change doesn’t usually follow elections, and, if it does, the impact on financial assets is often unclear, so we certainly don’t position portfolios for election outcomes.
In summary, there are some structural forces in place, such as elevated political and geopolitical risk, as well as medium-term inflation risk.
However, as ever, it is unclear to any precise degree how financial markets will evolve, including into the rest of this year, and we believe it is disingenuous to argue otherwise and therefore unwise to have high conviction in forecasts, particularly around elections.
What we can say with some conviction, is that sensible portfolio construction, including holding liquid assets that have positive price momentum, being genuinely diversified across different sources of risk and return, including having an open mind to diversifying equity risk, and minimising currency risk, all increase the chances of performing well across the range of most likely scenarios.
Anthony Rayner
Premier Miton Macro Thematic Multi Asset Team
