Horizon Q3│2024 - Multi-asset strategy

In a nutshell

A global economic recovery has become more likely. Europe and Asia are gaining momentum and the US remains robust. Earnings expectations are rising.
In addition to the structural reasons for higher inflation over the medium term, the risks of more persistent or higher inflation are increasing as growth improves. Neither equities nor bonds have priced this in.
Sentiment and positioning make markets vulnerable to corrections. Equities and government bonds are likely to move sideways in a volatile manner until the US elections. We favour riskier segments of bonds, commodities, commodity companies and European equities, especially small caps.

Portfolio positioning at a glance

After a strong first quarter, we were more cautious in equities at the start of the second quarter. We took advantage of the setback in April to slightly increase our equity allocation.

The improved economic and earnings outlook is favourable for riskier assets. We are accordingly positioned with a near-neutral equity weighting, a more aggressive stock selection (small caps, materials), an overweight in commodities and a focus on credit/high yield and emerging market bonds rather than safe government bonds. Given the recent negative economic surprises in the US, the optimistic investor sentiment and positioning, the ambitious valuation of US equities in particular and the continued high level of uncertainty (inflation, elections, geopolitics), a more aggressive positioning is not appropriate. Safe government bonds offer attractive real yields, which should help in the event of weak growth. However, bonds, like equities, are vulnerable to more persistent inflation as break-even inflation rates are surprisingly low. We therefore continue to favour short to medium maturities and avoid long duration relative to the benchmark. Commodities, especially gold and industrial metals, remain a focus.

Second quarter: focus shifts to Europe and Asia

The economic picture in Europe and Asia brightened in the second quarter, while the US economy remained robust but weaker than expected after a strong first quarter. This was initially reflected in the markets. The US dollar depreciated somewhat. US equities barely made any gains. European and emerging market equities performed better. However, following the announcement of new elections in France in June, the picture reversed, with the US dollar and US equities ultimately coming out on top. The economic upturn in Europe and Asia supported base metals, which rose by more than 10% in the second quarter. Alongside the base metals, gold was the best performer in the second quarter and has now outperformed equities since the beginning of the year. Rising yields and falling credit spreads in the wake of the economic recovery led to the outperformance of riskier bond segments and shorter maturities.

Tabelle Multi Asset Strategy EN — Time period: 17/06/2019-17/06/2024. | * CAGR = annualised return (in %, in EUR); Std. dev. = annualised standard deviation (in %, in EUR).

Picture of a global economic recovery still intact

Consensus forecasts for global economic growth in 2024 conti-nued to rise in the second quarter, increasingly driven by Europe and China (chart on page 5). The global manufacturing PMI has been above the critical 50 level since February and reached 50.9 in May, its highest level since June 2022. Consensus earnings expectations for 2024 and 2025 have stabilised and even been revised slightly higher, particularly in Europe (chart on page 5, centre). A sharper slowdown in US growth remains a key risk to this positive economic picture and to markets.

Multi-Asset-Strategy EN 1 — Time period: 30/09/2023-17/06/2024.

Multi-Asset-Strategy EN 2 — Time period: 01/01/2022-17/06/2024.

Inflation remains the dominant theme on the markets

In the past, we have repeatedly discussed the structural reasons for higher inflation in the medium term. However, if the soft landing of the US economy is successful, the more positive outlook for the global economy now also makes more persistent or even rising inflation another major risk for markets in the short term. The so-called base effects, i.e. the pure decline in inflation as earlier strong price increases are no longer included in the year-on-year comparison, have largely come to an end. By contrast, Chinese freight rates, US natural gas prices and other commodity prices have risen sharply, as have wages in Europe. It will be at least a few years before the use of AI has a dampening effect on inflation. Stubborn inflation in the US has already led to a further delay in the Fed's rate cuts. Instead of the three cuts expected this year in March, less than two are currently priced in. Bond yields have continued to rise, with 10-year US real yields averaging around 2.1% in the second quarter. However, as long as interest rates do not rise further, the timing and magnitude of rate cuts may become less important to markets if Europe and China gain further moementum, the US economy remains robust and earnings expectations continue to rise. The continued high correlation between equities and safe government bonds is another indication that inflation remains a key concern for markets. And the strong performance of commodities in April showed once again that they often benefit when stocks and bonds suffer from surprisingly high inflation at the same time.

Bond yields unlikely to fall by much even if interest rates are cut

If central banks are slow and hesitant to cut interest rates in an already recovering economy, long-term bond yields are unlikely to fall. Bonds price in little inflation risk, and with structurally higher inflation and rising government debt, the yield curve is likely to steepen again in the medium term (normalisation of the term premium). In the USA in particular, in light of the high budget deficit and the resulting high supply of Treasuries, long-term yields are likely to only fall in the event of significant growth weakness.

Europe's advantage? Fundamentally yes, but with high political risks

Europe's relative performance to the US remains difficult to assess. Fundamentally, there are a number of factors working in Europe's favour: more attractive valuations, the earlier interest rate cut, the pick-up in economic growth, the low positioning of international investors and the positive inflows in May and early June. This was also reflected in the fact that European equities initially outperformed US equities in the second quarter and market breadth in Europe increased somewhat. However, the French and US elections remain major risks that argue against a strong overweight in Europe. Europe's ability to act is at stake, and Trump could cause a stir during the campaign by threatening a trade war or questioning support for Ukraine.

Declining volatility, dominating optimism, relatively high positioning and diverse risks for equities

Despite a slight tightening of valuations in recent months, the upside potential for equity markets remains limited – only upward revisions to earnings expectations would help. Equity markets continue to price in a very favourable economic and earnings outlook, but little risk of stubborn inflation or stagnant growth. We maintain our view that further strong valuation expansion, especially for US equities, is unlikely even if interest rates are cut. In addition, the setback in the markets in April has not led to an adjustment in the positioning of systematic investors. In particular, CTAs and volatility-targeting strategies are very positive. Investor sentiment is optimistic. This makes equity markets more vulnerable to setbacks and uncertainty (inflation, US economy, elections, geopolitics) remains significantly higher. Despite the improved economic and earnings outlook, this argues against very aggressive positioning. We expect a volatile sideways movement until the US elections.