Macroeconomic backdrop

The US Federal Reserve (Fed) kept interest rates on hold, with chair Jay Powell indicating that patience is needed to “let restrictive policy do its work”. The minutes of the Fed’s latest meeting showed some policymakers favouring a rate hike, although Powell signalled such a move was unlikely. Donald Trump was found guilty on all 34 counts in the ‘hush money’ trial. Elections continued globally. In India, early results indicated that Modi would be returned, while in Mexico the first female president was elected. South Africa’s ruling ANC party lost its parliamentary majority.

Market update

In May, global equities advanced once again, as the Fed, the ECB and the BoE kept their tightening cycle on pause, instead anticipating a first rate cut. US stocks were among the strongest performers, as technology stocks rebounded. Nvidia became the third largest company in the US, after Apple and Microsoft. European and Japanese stocks also moved higher, albeit to a lesser extent. In contrast, emerging market equities lagged, with Chinese equities delivering mixed returns as gains in Hong Kong listed shares were countered by weaker returns from onshore stocks. It was a mixed month for global government bonds, although US Treasuries delivered gains. The euro appreciated against the US dollar and the Japanese yen over May. Oil prices retreated amid concerns over a glut of supply, while gold continued to rise.

Our view

We still see a high probability of a soft landing. The current environment in the US is characterised by some disinflationary forces and robust, although slowing, economic growth. In Europe, lower inflation and more modest growth has seen the ECB cut rates in early June. Equity markets have enjoyed a rally this year, pricing in this scenario. On the other hand, bond markets are still reassessing the timing and probability of other rate cuts in 2024, which has resulted in global bond yields rising, as prices fell. Within the fixed income space, only high yield credit assets have delivered moderately positive returns this year.

In this context, we still prefer equities over bonds and alternative assets. Most equity markets should still benefit from positive earnings growth momentum, although we acknowledge that valuations are getting tighter. We are taking profits in Japanese equities. Some rerating of valuations has already occurred here, following structural reforms, limiting outperformance relative to other developed markets near-term.

We maintain our slightly negative view on emerging market equities. There are concerns over geopolitical risks, such as the Ukraine war and elections in India, Mexico and South Africa, as well as ongoing issues with the Chinese property market and the risk of sticky inflation delaying monetary easing. We prefer US equities because of clearer visibility on earnings growth, and European equities because of better valuations and the higher likelihood of monetary policy easing.

Within fixed income, we keep a preference for eurozone over US bonds, due to growth and inflation differentials. We foresee more uncertainty about the timing of US interest rate cuts, while yields should be more stable in the eurozone in light of the latest ECB guidance. Because of historically low credit spreads, we remain neutral on investment grade and high yield corporate bonds, as well as emerging market debt. We see no immediate catalyst for spreads to narrow further.

Going forward, we will use any equity and bond market setbacks to reinvest the cash raised this month, as we remain positive on the prospect of a soft landing scenario.