Economic cycle maturing across Europe and the US.

At True Potential, we work with world-class fund managers across the full spectrum of asset classes and markets. We use their insights to inform our own outlook on global markets and economies. Here, we set out the key themes that we believe are driving markets at the moment.

• Economic data supports our view that the US economy is slowing to a non-inflationary equilibrium. This data includes slowing job gains, rising unemployment and cooling wage growth.

• We believe that recent concerns about US growth are overblown. The US economy still continues to add around 150,000 jobs a month, earnings estimates are still robust, and the balance sheets of both households and companies are still in good health.

• Nevertheless, the balance of risks is shifting towards a further economic slowdown, simply because the output gap is normalising from abnormally positive levels as unemployment rises.

• The US needs lower interest rates, and the surprising rise in unemployment should allow the Federal Reserve to cut rates with confidence. The market’s inflation expectations are falling back, which should also make it easier for the Fed to lower rates. Should US corporate profitability be sustained, however, lower real interest rates should support equity markets.

• We continue to favour an overweight position in equities and higher exposure to sovereign bonds.

Around the world 

The economic cycle is maturing across Europe and the US. Expectations for economic growth outside of the US are modest. Global manufacturing data is still positive, although the global economy is clearly slowing. Stock markets are looking fully valued in the US and Japan but continue to offer fair value elsewhere.

Despite significant volatility early on, the US equity market rose further in August on hopes of interest-rate cuts in September. Real GDP growth looks set to slow as US households cut back on their consumption.

In Europe, economic surprises have been negative, and falling purchasing managers’ indices point to significantly weaker growth than in the US. In the UK, economic surprises have remained positive, but the trend is waning. Both continental European and UK stock markets rose over August. The Japanese economy continues to grow, but Japan’s stock market was exceptionally volatile over the month, with an overall decline.

Valuations and asset views

Besides equities, we invest in bonds, alternatives and currencies on behalf of our clients. Here’s how we view each of the major asset classes at present. As ever, we pay particular attention to valuations.

• Although the US and Japan now look fully valued, equity valuations still appear fair elsewhere.

• In True Potential’s view, we see our weighting to sovereign bonds as a potential portfolio hedge should we see a negative economic growth shock. Our preference is now for UK gilts over global sovereign bonds.

• Alternatives are a useful source of diversification in the event of higher-than-expected inflation, which could challenge traditional assets.

• In currency exposure, we remain neutral on sterling. This is because we still see room for the UK’s stickier inflation components to lead to interest rates relatively taking longer to come down.

Summary 

We are multi-asset investors who take a long-term view on the world’s markets. Given fuller valuations, we have grown more cautious on the US and Japan in the equity markets. In the bond market, we continue to favour UK gilts. We remain alert to opportunities across the full span of markets and are committed to global diversification across our portfolios.

All data sourced from Bloomberg L.P. (02/09/2024)