Guide to the Markets: Daily edition
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Key themes for 4Q 2024
The balance of risks for the global economy is shifting
Our core economic scenario is little changed relative to the start of the year, with US growth moderating and European growth accelerating modestly, causing the gap in growth between the regions to narrow (Guide to the Markets – Europe pgs 4, 34). The balance of risks around this view is, however, shifting. For much of 1H the risks were skewed to the upside – more consistent with ‘no landing’ and sticky inflation, than ‘soft landing’ (pg 7). The balance of risks is now more even, if not slightly skewed to the downside (pgs 14, 18, 27).
Core bonds are diversifying again
Fortunately, as growth is coming off the boil so is inflation, giving central banks room to pre-emptively ease off the brake (pgs 20, 33). Core bonds should therefore act as a shock absorber if data deteriorates further (pg 67). We have more conviction in extending duration in European core bonds than the US. Within credit, we prefer the higher duration and credit quality of investment grade over high yield (pg 65). Strategically, we still advocate building larger positions in alternatives to insulate from the structural presence of inflation and fiscal risks in the coming decade (pgs 21, 77).
Shifting gears in equity performance
The long-anticipated broadening out of US corporate earnings is finally underway, yet valuation dispersion in the stock market is still extremely wide (pgs 54, 55). As earnings growth becomes more evenly distributed across sectors, this could also support a regional rotation and a reduction in the discounts of some less-loved equity markets around the world (pgs 46, 49).
Big unknowns, big implications
The US election, broader geopolitical events, the evolution of AI, and the unwinding of the Japanese carry trade could all have significant implications for markets (pgs 24, 39, 63). This summer’s volatility has demonstrated the importance of a well-diversified portfolio, and investors should be prepared to withstand further pockets of volatility ahead (pgs 66, 97).