2024 so far is a good vintage for a diversified portfolio.
Positive performances have compensated for elevated volatility, which stemmed from ever-changing economic and monetary projections in recent months. Other sources of volatility, especially politics, could become increasingly important in the second-half of the year.
So far, so good.
As we initially expected, returns were differentiated between and within asset classes in the first-half of the year. Still, the double-digit gains in stocks and gold, followed by high-yield bonds, hedge funds or even money markets, more than offset negative pressure from long duration bonds and global real estate.
The very young H2-2024 starts even better.
Solid June PMIs
June PMIs, released last week, were reassuring: the composite indices were above the 50 expansion level for all major regions, with, on average, a very gentle deceleration. The minutes of the last Fed policy meeting had a balanced tone between the dual sides of their mandate: inflation and employment.
Precisely, and finally, the monthly US employment report showed some moderation in job creation for the May-June period. Bottom-line, the scenario of a global economic soft-landing is gaining further credibility: activity decelerates enough to keep disinflation alive, but not to alarming levels that could lead to a recession.
This reinforces hopes for rate cuts to start in the US and to continue in the rest of the West in the months to come. Markets loved it, and last week was a positive start to H2 for all asset classes. This was not just a Western phenomenon: the 2024 equity rally is broad, especially as last week’s weakening US dollar supported emerging markets.
Within the global MSCI country indices, India for example holds the top spot of 2024 when it comes to US dollar-denominated returns, outperforming the US.
Having said that, last week was not only about economic data releases but also about political events with national elections in no less than three large countries. Iran’s new President is on the moderate/centrist side, which could lead to potentially more diplomatic engagement with the West.
Investors mull France's verdict
In the UK, as expected, the Labor party won a significant majority in general elections, with a probably slightly pro-growth agenda. These may not be game-changers, but these are changes. France, by contrast, delivered a big surprise compared to polls readings.
The broad alliance NFP, which spans from radical to centrist left, surprised by gaining the largest number of seats. It was followed by the Presidential formation, taking an equally unexpected second place, while the poll leader, the far-right RN, only came third.
Importantly, none of these groups has a majority, which leads to relatively unchartered political territory for the country, where the house has never been that split in recent institutional history. This may have consequences on French policies and markets, with obvious concerns about public debt. It may also just lead to a gridlock, waiting for the next election to provide a majority. Or not?
The most important for our broad investment picture is not France in itself, but the confirmation that political unpredictability is on the rise. It’s not outrageous to say that the short-term visibility on the relative trajectories of growth and inflation has improved, which is obviously good news.
The point is that other sources of volatility could now take centerstage, which matters at a time when market valuations leave little room for disappointment. Many assets are priced for an immaculate ‘soft-landing’ scenario with little, if any, bump on the road.
The US, which is of course, like it or not, the world’s financial hegemon, is definitely not out of political uncertainty. Earlier this year, our view that Biden may not run for a second term was very contrarian. It is much less now, and it has implications.
Watch out for any US domestic weakness
More uncertainty weighs on investors’ risk appetite, on companies’ investment plans, and anything that could be perceived as a US domestic vulnerability could trigger unexpected geopolitical events. It’s not about the November outcome in itself; it is about the change in scenarios before that, and certainly even more about the possibility of not having a decisive and widely accepted result then.
The returns of our recommended asset allocations in 2024, at respectively +3 per cent, +7 per cent and +9 per cent in rounded numbers, are already not very far from what we were initially expecting for the entire year.
Part of this extra performance comes from good reasons, especially a better-than-expected economic backdrop. However, part of it may be the anticipation of a relatively visible future, which is realistic on economics, but a bit optimistic on the rest.
The beauty of the moment is that with positive returns so far in 2024 after an even better 2023, the key question is not about taking losses but about securing some profits or staying fully invested as we currently are.
For the long-term, the latter is usually right.
On a tactical horizon, this is not certain, and we will soon finalize our midyear updated views. In any case, it’s always good to use these good times to check that your asset allocation is balanced, and to consider taking some profits on the most spectacular contributors of your portfolio.
