Global asset manager abrdn has just published its latest quarterly report on the macroeconomy and investment outlook for the fourth quarter of 2024.
Edinburgh-headquartered abrdn remains positive about
equities and bonds in the fourth quarter of this year. This is in
light of monetary easing and an expected global economic
soft landing, but it has become tactically overweight in the
dollar to hedge against the US election outcome and geopolitical
risk.
Spiking tensions in the Middle East are a risk to the outlook,
but oil prices would have to rise by a lot to prevent central
banks cutting interest rates further, the firm said in a
statement.
Meanwhile, as the US presidential election looks set to hang on a
very small margin. With a 50 per cent chance of a Trump victory,
abrdn sees potential for trade and fiscal policies that could be
inflationary.
However, it is recession, rather than inflation, which abrdn sees
as the bigger risk for markets over the medium term, whoever ends
up in the White House.
The asset manager sees fundamental support for corporate
earnings, and a benefit in holding duration. But as the
prevailing macro environment moves from one characterised by
negative supply shocks to potential negative growth shocks, bonds
and equities ought to move from being positively correlated to
negatively correlated, providing diversification, the firm
continued. This has been the case in recent months, with duration
performing during equity market corrections.
“Geopolitical uncertainty will shape this quarter and beyond with
several major risks to our main scenario. One is further conflict
escalation in the Middle East that sends oil prices and
geopolitical risk premia substantially higher. Another is a risk
of US-led recession,” Peter Branner, chief investments officer,
abrdn, said. However, looking through the risks, he
forecasts cooling yet still positive US growth, inflation around
central bank targets, a global rate-cutting cycle, and a
tentative view that Chinese stimulus is shifting higher.
“In terms of opportunities, whilst both equities and bonds have
done well so far this year, we see ongoing fundamental support to
corporate earnings, and benefit in holding duration given the
risks. There are bright spots in real estate, and we’re
tactically overweight in the US dollar as we see the US election
as 50:50,” Branner added.
Equities
A proactive approach to monetary easing and the materialisation
of a soft landing should support corporate risk. The recent
earnings season saw positive revisions, and a broadening out of
earnings growth to cyclical sectors should support prices. While
US equity valuations are elevated, abrdn thinks that tech stocks’
high margins, high free cash flow generation, and strong balance
sheets set them apart from past bubbles.
The asset manager has also shifted to signal a modestly positive
view on emerging market (EM) equities. There has been a step
change in the extent of Chinese policy easing which could lead to
a significant higher repricing of Chinese equities. However,
sustained support will be required to offset structural headwinds
from real estate.
Bonds
abrdn remains positive on duration, signalled via an overweight
to global government bonds and to emerging markets local currency
bonds. However, reflecting the extent of the rally in duration
markets and emerging markets currencies, and risks from a Trump
presidency, the emerging markets local bond conviction was
lowered.
With interest rates having moved over the last quarter, it could
be that duration is a tactical neutral at this point. But with
recession risks elevated over the 12 to 18-month horizon, it is
sensible to hold some duration.
Real estate
abrdn has upgraded its view on direct global real estate to
positive and finds listed real estate, in geographies such as the
UK and Europe, and sectors such as residential, hotels, student
accommodation, data centres, and logistics are the most
attractive.
There has been a deep valuation correction across global real
estate markets, especially in the UK and Europe, and in the
office sector. However, this process now appears to be largely
complete. The yield premium on real estate, especially as policy
rates are being cut, is attracting capital back into the sector.
And constrained supply is supporting rental value growth as
occupiers consolidate into future-fit properties.
Hedging Trump
abrdn recognises that the US election is a key risk to the global
economy and has analysed various US election scenarios to try to
understand how different election results could impact asset
prices and portfolios.
As a result, the firm has become tactically overweight in the
dollar in the run-up to the US election. In the soft-landing base
case for the economy, abrdn expects the dollar to modestly
depreciate over the medium term. But in the event of a Trump
victory, the dollar would likely appreciate and hedge losses on
other positions.
Macro
The asset manager expects a global economic soft landing and has
become less concerned with the risks of an inflation overshoot
generated by low unemployment and strong wage growth.
There are certainly still several sources of upside global
inflation risk, including a sharp rise in oil prices and
disruptions to global supply chains related to spiking tensions
in the Middle East.
But despite the soft-landing baseline, the firm notes that the US
economy is slowing, with interest rate-sensitive sectors such as
manufacturing and housing struggling, and the fiscal impulse
fading. It is possible that this slowdown could morph into a more
damaging contraction.
This economic backdrop explains why abrdn is expecting a
sustained global interest rate-cutting cycle and continues to
judge that global equilibrium interest rates will remain
relatively low, around 2 to 3 per cent in nominal terms. However,
while it is significantly uncertain about this judgement, many of
the structural factors that pinned equilibrium rates down before
the onset of the pandemic are still broadly in place. The recent
sharp slowing in nominal growth also suggests that the policy
stance has been tight. As such, abrdn believes that the global
rate-cutting cycle has significant room to run before interest
rates return to a more neutral setting, let alone a stimulative
stance.