In the last week, we carried out in Criteria a new Global Investment Committee, in which our team of specialists analyzed the portfolio strategy for the last quarter of 2024. Below, we share the main conclusions, along with the recommendations for adjusting the portfolio in response to a new panorama in global markets.
After a period of turbulence originating in Japan, which shook risk assets and led the S&P 500 to border on correction territory in early August, Global financial assets have recovered to their pre-event levels. They are currently maintaining their rally, achieving a gain of close to 20% for the US stock index so far this year, a remarkable performance.
The economic context shows, in this sense, auspicious signs that support the optimistic climate, despite the doubts that still persist regarding the possibility of a recession on the horizonEmployment data in the United States show a stronger economy than previously expected, and inflation – although resilient in some sectors of activity – has begun to gradually decline.
However, economic growth is beginning to show signs of slowing, which has led the Federal Reserve to become more cautious. On the other hand, the base scenario with which the market operates is a monetary policy rate cut that could reach 1% in the remainder of 2024.
Inflation converges to the target
Quarterly change in the US Consumer Price Index, by component:
Soft landing or recession?
The positive surprise that represents a resilient activity and the earnings growth expectation of companies also provides very strong support for valuations, an indispensable foundation to explain the persistent asset rally we have been seeing this year.
Currently, we estimate The probability of a soft landing scenario, i.e. a gradual decline in inflation without an economic recession, is around 60%.On the other hand, we assign 15% to a context of sustained economic growth, and 25% to a context of contraction.
We believe that prices reflect a market operating under the premise of our base scenario, the “soft landing” scenario. However,We also consider the probability that there will be no economic contraction. and that, driven by a significant increase in productivity, as in the second half of the 1990s, the tailwind for sustained economic growth continues. This would certainly be a fundamental pillar for thinking about a prolonged rally in financial assets.
S&P recovers all ground lost in August
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Looking ahead, one of the main points to think about regarding the performance of financial assets will be the electoral event which will take place in November, where the United States will elect a new president.
While we don’t see major divergences in this country’s fiscal path depending on who wins, If we can foresee a strong dollar scenario in the event of a Donald Trump victory, but a somewhat more uncertain outlook for bonds and stocks.
This is because even though lower taxes, as Trump suggests, would benefit publicly traded companies, a Possible increase in import tariffs could dilute these advantagesIn the case of debt, an improvement in this regard (tax cuts) boosts economic efficiency and contributes to lower costs, but can have an impact on the deficit.
Investment strategy
We believe that In the fixed-income market, the value remains in the middle section of the curvein three- to five-year terms, which benefits from the Fed’s rate cuts, while offering greater protection than the long tranche against noise that may arise from concerns about fiscal health in the US.
Regarding the different segments of fixed income, We favor asset-backed debt over the low remuneration of corporate debt in general and the high performance one in particular. We continue to consider the existence of a attractive opportunity in emerging market debt.
As for equities, we anticipate that there could be greater volatility in the short term. for stocks due to the US election
However, we do not change our long-term view, highlighting the possibility of a productivity-boosting scenario, similar to that experienced in the second half of the 1990s, driven by artificial intelligence. We maintain a position in stocks with a strong bias in the US and a preference for those with large capitalization and growth.
S&P 500 valuations return to historical average:
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Source: Ambito
