The Best Strategies to Close Out 2024

On June 25, we organised a conference for our Global Markets clients on the best strategies to adopt over the next six months. Our experts shared their views on the added value of Quantitative Investment Strategies, emerging markets and de-dollarisation, as well as the overhaul of the European electricity market and its implications for the nuclear industry.

Disinflation and rate cuts look set to continue in H2 2024. However, with elections in France and the US threatening greater political risk, investors should remain cautious. Natixis CIB’s Midyear Outlook examined the key trends set to impact global markets in the next six months.

Markets have experienced a strong start to 2024. With the majority of leading economies nearing their growth potential for the year, Global GDP has somewhat exceeded the expectations of six months ago. Meanwhile, disinflation is beginning to take hold with more central banks cutting rates than hiking them – a trend we expect to continue in H2. That said, with elections looming in the UK, France and the US, political risk is very much on the cards and could impact projections as the year progresses.

Following five quarters of stagnation, the European economy is showing signs of recovery. Growth for the eurozone is nearing 1% so far this year, largely driven by increased consumer spending off the back of growing wages and a normalisation of savings. Meanwhile, the European Central Bank (ECB) cut interest rates for the first time in five years after confirming a significant slowdown in inflation. Economic expansion is expected to continue at the same pace into 2025, with the ECB likely to make an additional three cuts (September, October, and December) before the end of the year.

The US economy, meanwhile, continues to demonstrate impressive resilience, with a soft landing still firmly on the cards. A slowdown in growth is predicted for the remainder of the year, with tightening policy expected to disproportionately impact lower and middle-income families, with consumption driven by borrowing rather than wage growth. Meanwhile, the Federal Reserve (Fed) will likely undertake two interest rate cuts by the end of the year.

In both cases, however, looming political elections could alter the trajectory for the rest of the year. In France, the baseline assumption is a deadlocked parliament and an ensuing minority government. The alternative is a leap into the unknown, with a radical government pushing unfunded policies at odds with the European agenda. Meanwhile, for the US, a Trump win could see an increased focus on immigration and import tariffs cause an inflationary spike, in addition to escalating geopolitical tensions with China.

As markets exit an extended high-rate period, investors have turned their focus to the possibility of a steepening of yield curves. Natixis CIB expects this re-steepening will be more progressive than initially expected for several key reasons. First, low expectations for key rate cuts and terminal rates currently are built into the Euro and Dollar curves. For the Euro curve, for instance, less than two 25bp cuts are priced this year, whereas we expect to see four. Meanwhile, for the dollar curve, the market expects nearly two rates this year and a Fed fund rate close to 4% at the end of 2025, which exceeds the 3.25% we forecast.

Second, we view the maintenance – and in some cases, strengthening – of term premiums as another reason for justifying a more positive prediction for curve steepening. These term premiums act as a floor for long rates and are set to strengthen in the US and Eurozone as a result of high government bond issuance volumes, high inflation premiums over the long term, and the prospect of market resilience or rebound in the US and Europe respectively. These premiums are here to stay and may even get bigger.

Finally, given markets have more or less dropped expectations for the Fed to hike rates – in turn, diminishing the potential for further flattening over recent weeks – market positioning is currently relatively neutral. We expect investors to wait until the Fed starts its rate-cutting cycle – likely later this year – before more firmly positioning themselves on steepening strategies.

With US equity indices at new highs, European indices consolidating, and risk appetite sustained across the market, risky assets are currently resilient. However, political risk in emerging markets and, most recently, pertaining to the French general election, has seen risk perception increase. That said, should factors such as US growth remain strong, we envisage a positive outlook between now and the end of the year.

For the remainder of 2024, we expect moderately positive total expected returns for the main US asset classes. On the US equity front, high valuations, low volatility levels and an accumulation of short volatility trades – together with the recent strengthening of equity positioning and the extreme risk and performance concentration within US indices – have increased the likelihood of short-term corrections. As such, long equity strategies remain in favour, with a particular emphasis on quality, growth and big caps.

With volatility expected throughout the remainder of the year, defensive positions are likely to be commonplace. It will become increasingly important to ensure a diversified portfolio, especially at a time of increased concentration on big tech. As things stand, the ‘Magnificent Seven’ (Alphabet, Apple, Amazon, Meta, Microsoft, Nvidia and Tesla) accounts for over 42% of the Nasdaq, and when looking at US Tech ETF flows, the upward trend seen from the last decade appears to have accelerated in recent months. While there is no immediate risk of market overheating, caution is advised.  

Valuations are entering dangerous territory and investor’s bullishness on artificial intelligence (AI) is also creating a small cluster of stocks. The continued growth of such firms is a reasonable assumption, analysis suggests that the upside is becoming limited and that diversifying away from the big tech ecosystem may serve as useful protection against unexpected changes to growth trajectories.  

Several underlying factors have helped benefit credit since the start of the year. Attractive absolute yields and improving credit quality for corporates and financials (excluding high yield) have boosted credit performance. From a wider perspective, there has also been an improvement in economic activity indicators in Europe and expected rate cuts by the ECB have paved the way for significant net inflows into Euro credit funds. Notably, these factors have enabled High Beta credit indices to generate positive total returns so far this year. 

For H2, whether political risk will disrupt the market’s upbeat position remains to be seen. In a situation where political risk in Europe wanes, regular market conditions for corporates would likely prevail. This would see global HY default rates falling to below 4% by end-of-year, credit conditions for corporates continuing to ease, and an acceleration of inflows into credit funds.

The situation is less favourable for financials, who have seen a faster tightening of their spreads compared to corporates so far this year – 22bp vs 6bp. The heightened sensitivity of financials’ spreads means they are much more susceptible to market volatility brought about by heightened political risk in France and across Europe.

Looking ahead, the situation remains somewhat precarious, but there is room for optimism. The global economy has exhibited a stronger recovery than anticipated at the start of the year, with many leading economies near their growth potential. The growth-cutting cycle will be welcome news for investors, with the ECB set to initiate further cut rates in September followed by similar actions from the Fed near the end of the year. That said, investors should remain cautious. Political risk will remain prevalent – especially in France and the US – and big tech concentration will continue to provide increasingly limited upside.