An increasingly narrow path to meet our central scenario for the global economy comes with two-sided risks.
Our macro base case over the next 18 months is resilient global growth and sticky inflation. An increasingly narrow path to meet this central global economic scenario comes with two-sided risks. This environment is a reminder to investors of the importance of well-diversified portfolios across equities, fixed income and alternatives.
Macro: Growth remains resilient globally, with a shift in regional strength. The US economy slows slightly while European economies accelerate. Inflation remains sticky but a reacceleration is unlikely. Interest rates are lowered moderately but more substantial rate cuts are not required.
Markets: This scenario supports a valuation catch-up in leftover segments of the equity market, particularly Europe. Bonds are important, offering income in a higher-for-longer interest rate world. More conviction in European vs. US duration, given US inflation and fiscal risks.
Macro: Developed market economies slip into mild recessions as long and variable lags of monetary tightening take hold and/or political uncertainty damages confidence. Interest rates are cut by considerably more than currently priced to support the economy.
Markets: Moderate downside for stocks. Higher quality and income strategies outperform. Positive environment for core fixed income.
Macro: US growth does not slow and a broader global growth acceleration causes an acceleration in inflation. The US election could exacerbate inflationary pressures if tough protectionist and anti-immigration policies are pursued. Interest rates move even higher to squeeze out inflationary pressures.
Markets: Negative environment for stocks. Rising yields on core fixed income lead to losses as stock-bond correlations remain positive. Real assets and commodity strategies outperform cash while hedge funds that can benefit from higher volatility also perform well.
Macro: Growth accelerates driven by an AI-induced productivity boom. Inflation simultaneously falls back towards 2%, allowing interest rates to fall gradually despite strong growth.
Markets: Very positive environment for stocks, particularly in the US. Catch-up in US stocks outside of the magnificent seven. Decent environment for fixed income as central bank interest rates move gradually lower but credit spreads remain tight.