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Despite widespread expectations of a global economic slowdown in 2024, growth and inflation have continued to perform above expectations across most major economies. Our investment outlook for the rest of the year (read the full report here) centers on the path of inflation and how central bankers weigh the balance of risks in beginning to ease monetary policy.
In our assessment, demand-side resilience has delayed the disinflation narrative across major Western economies, particularly in the U.S. However, we continue to anticipate falling inflation across most economies in the second half, with disinflation realized more quickly in non-U.S. developed-market economies but at a trajectory that elicits only marginal interest rate cuts.
As supply and demand factors come into better alignment over time in Western developed economies, we expect inflation to continue to fall towards central bank targets and a gradual return to trend growth rates aided by marginal rate cuts from major central banks. However, we anticipate disinflation to be realized at a pace significantly slower than our previous expectations. The passthrough effects from the impact of central bank policy tightening has taken longer than expected, with effects beginning to be realized at the margins.
As part of our view, we see the global economy in a soft patch in the near-term, driven by a restrictive monetary policy backdrop that translates into below-trend but still resilient growth. With individual economies likely to see various growth and inflation experiences going forward, we believe divergence will be a core theme through the rest of 2024.
Thus far, the U.S. economy has been less affected by tighter monetary policy. But after a series of upside surprises in U.S. macro performance, underlying growth appears to be showing signs of weakness, including rising credit card balances and delinquencies,1 as well as a tick upward in the unemployment rate. We believe the U.S. will likely grow at a modestly below-trend rate for the remainder of this year, constrained by the effects of restrictive monetary policy.
In our view, inflation is likely to continue a bumpy path downward through the end of the year, with the Consumer Price Index expected to end the year lower but still well above the Federal Reserve’s (Fed) 2% target. The stabilization of inflation at above-target rates should likely limit the degree and pace of monetary policy loosening, in our view. We anticipate two rate cuts this year, likely beginning in the third quarter. The timing of rate cuts is unlikely to be influenced by the U.S. election in November.
U.S. equity markets have benefited from continued earnings growth and moderating inflation, as well as thematic stories such as the rise of artificial intelligence. We believe current elevated U.S. equity valuations suggest a lot of positive sentiment is priced in, including narrow credit spreads and continued earnings growth.
In summary, our expectations for growth remain resilient, and we believe the risks for disappointment are elevated. We favor risky assets but with limited upside potential due to this backdrop.
We believe markets today reflect a relatively optimistic macro scenario. We anticipate volatility in the near term as markets react to shifts in the rates outlook, including any supporting or conflicting data points along the way. In our view, the precise number of cuts is less important at this stage than the timing of them, especially as the market narrative continues to be highly volatile. There could also be a significant risk that some markets may be overly positive and have not fully priced in potential problems.
Given the positive macro backdrop, we favor an overweight to risky assets. However, we note the need to keep risks tightly controlled as very tight valuations limit the upside for risky assets.
Equities. With our belief that global economic growth is likely to improve, we favor cyclical and small-cap equities given relatively attractive valuations and greater sensitivity to the economic cycle. We also prefer developed ex-U.S. and emerging markets equities for those same reasons. As central banks cut rates, we anticipate that valuations should also see support from lower discount rates.
Bonds. We believe bonds also offer attractive opportunities despite tight spreads, especially for longer holding periods. In our view, strong fundamentals underpin many fixed income assets, helping to explain extremely tight credit spreads in both investment grade and high yield credit. We favor some credit risk to take advantage of this resilient and improving growth backdrop. We also like the diversification properties of bank loans, which tend to have similar volatility to investment grade credit but with greater return potential (in our opinion) due to the high current yield. Given the near-zero duration of bank loans, we expect them to be relatively immune to interest rate volatility compared to other fixed income asset classes. We also anticipate strong performance from emerging markets local and hard currency bonds.
Real estate. We are also finding more opportunities in real estate. We believe that significant negative sentiment is already reflected in the price, and there could be meaningful upside potential as the environment improves. For example, cuts in policy rates provide scope for reductions in real estate debt costs and capitalization rates, which we believe could lead to renewed transaction activity and progress toward price recovery.
Currencies. We anticipate the U.S. dollar will begin to weaken this year as the Fed begins to cut rates and would favor currencies such as the euro, the pound, and the Brazilian real.
Kristina Hooper is Chief Global Market Strategist at Invesco. This is an edited version of the Invesco 2024 Mid-Year Investment Outlook.
Notes
1. Source: Board of Governors of the Federal Reserve System, as of March 31, 2024
Disclaimer
© 2024 by Invesco Canada. Reprinted with permission.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
The opinions referenced above are those of the author as of June 6, 2024. These comments should not be construed as recommendations, but as an illustration of broader themes. This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
Forward-looking statements are not guarantees of future results. They involve risks, uncertainties, and assumptions; there can be no assurance that actual results will not differ materially from expectations. Diversification does not guarantee a profit or eliminate the risk of loss. All investing involves risk, including the risk of loss.
Diversification does not guarantee a profit or eliminate the risk of loss.
All figures are in U.S. dollars.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
All investing involves risk, including the risk of loss.
Past performance is not a guarantee of future results.
In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.
Commissions, trailing commissions, management fees and expenses may all be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Please read the simplified prospectus before investing. Copies are available from your advisor or from Invesco Canada Ltd.
Investment funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that any fund or security will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. The foregoing is for general information purposes only. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.
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