In its asset allocation outlook for the third quarter of 2024, Manulife Private Wealth's Multi-Asset Solutions team points out that the United States remained the market leader during the first half of the year.
The fund manager believes the picture could change if economic conditions continue to deteriorate, and the rate-cutting cycle accelerates. “Certain assets with larger valuations cushions are set up to outperform,” believes the Multi-Asset Solutions team.
In its outlook published in July 2024, Manulife Private Management observed that European equities had seen their earnings beat expectations. It noted that U.S. small-cap equities were trading near all-time lows relative to large-cap stocks.
The team also praised Chinese equities, with their attractive valuations. They also see a return to favour for investment-grade bonds, under the influence of rate cuts in the United States. In their view, these declines would also benefit small-cap stocks.
Off the beaten track
“We are seeing a turnaround in Europe.” - Empire Life
According to Empire Life's 2024 Semi-annual Market Outlook 2024: Global Equities, published on September 6, the insurer notes that European markets have benefited from falling inflation and positive gross domestic product (GDP) revisions. “We are seeing a turnaround in Europe, whose GDP grew by 0.3% in the second quarter of 2024, reversing a 0.1% decline in the last quarter of 2023,” the insurer says.
Just as the S&P 500 index has benefited from the impetus of the Magnificent Seven (Alphabet, Amazon, Apple, Microsoft, Meta, NVIDIA and Tesla), the STOXX Europe 600 index also benefits from its group of leaders: the “Granola” stocks. Empire Life specifies that this is a group of several large companies, more diversified than the Magnificent Seven.
According to Empire Life, these European companies focus on advances in medicine, health sciences and technology. “In different capacities, these companies touch our lives on a daily basis and are expected to contribute to the returns of European equity markets,” they say.
Asia is also catching Empire Life's eye. Rising wages and improving corporate governance standards are two of the reasons for the insurer’s positive view of Japan heading into the second half of the year. The Outlook explains that Japan's largest companies have granted salary increases of 5.28% in 2024, the highest rise in 33 years.
Overweight in bonds
In the September 2024 issue of Monthly Macro & Strategy, iA Global Asset Management (iAGAM) asks whether the U.S. economy has suddenly become not so exceptional? In recent years, the term “U.S. exceptionalism” has become established, according to iAGAM's Monthly.
This expression is a concept that reflects everything from the United States' ability to inflate its public debt and the high valuation of its stock market. “Even the Summer Olympics seemed to confirm this exceptionalism,” write the monthly's authors. Neck-and-neck with China in terms of gold medals, the United States collected a total of 126 medals at the Paris 2024 Games, compared with 91 for China.
iAGAM notes, however, that the bond market is beginning to doubt the ability of the US economy to remain so exceptional for several years. According to the commentary, this sentiment is behind the jolts that caused the VIX volatility index to surge during the week of August 5. IAGAM also notes that, over the months, inflation has slowed in line with two dynamics: disinflation of goods at a steady pace, and slowing inflation in the services sector.
These dynamics led them to reduce their underweight position in fixed-income securities. “Our positioning changed over the month. Among other things, we are now overweight in bonds, and we have increased the weighting of Canadian equities and reduced our exposure to the US dollar,” summarizes Sébastien Mc Mahon, Vice-President, Asset Allocation, at iAGAM, and Chief Strategist, Senior Economist and Portfolio Manager at iA Financial Group, in a message to the Insurance Portal.
Mc Mahon also expects volatility to continue. “We maintain a position in gold, which should continue to benefit from the uncertain environment expected this autumn,” he added.
Ignoring the noise
Recent market volatility was accentuated by the release of softer U.S. economic data, including the August 2 non-farm payroll report, observes Fidelity in its outlook entitled Looking beyond the noise on market volatility.
Fears of recession have driven bond yields down, adds Fidelity. Even so, they believe that volatility is not necessarily a harbinger of recession. Fidelity portfolio managers David Wolf and David Tulk note that recent market volatility has probably been exacerbated by the market's strong appetite for IT stocks.
The rapid unwinding of foreign exchange positions following the expected weakening of the Japanese yen and limited seasonal liquidity also intensified volatility. “These events have caused fear in the markets,” say the two managers. In their view, these events are a reminder of the importance of continuing to focus on their “four-pillar research-based” investment framework.
Among these pillars is sentiment, which means taking advantage of market fears rather than indulging them. The underlying funds that both managers prefer as building blocks do the same thing: “they look for buying opportunities when sentiment regarding securities in their funds is overly negative.”
Wolf and Tulk are not convinced that the risk of recession has increased significantly since the week of August 5. For its part, iAGAM believes that the risk of a US recession over the next 12 months is low, probably in the range of 25% to 35%. The manager sees the US labor market normalizing, in a broad process of economic stabilization.
