Global asset management company abrdn has published its latest quarterly report on macroeconomic and investment outlook for the fourth quarter of 2024.
Edinburgh-based abrdn remains positive on stocks and bonds in the fourth quarter of this year. This takes into account monetary easing and the expected soft landing in the global economy, but the dollar is tactically overweight to avoid the US election outcome and geopolitical risks.
Escalating tensions in the Middle East are a risk to the outlook, but oil prices will need to rise significantly to prevent central banks from cutting interest rates further, the company said in a statement.
Meanwhile, the US presidential election is expected to be decided by a narrow margin. Abdon believes that with a 50% chance of Trump winning, trade and fiscal policy could cause inflation.
But Abdan believes recession, not inflation, poses a bigger risk to markets over the medium term, regardless of who takes the White House.
Asset management companies believe that they fundamentally support corporate profits and have advantages in holding periods. However, as the current macro environment moves from one characterized by negative supply shocks to one characterized by potential negative growth shocks, bonds and stocks have moved from positive correlation to negative correlation, leading to a diversification The company continued: This has been the case in recent months, with duration performing during the stock market correction.
“Geopolitical uncertainty will shape this quarter and beyond, posing several significant risks to our main scenario. One is that further escalation of conflict in the Middle East could lead to a decline in oil prices and geopolitics. “The risk premium has increased significantly. Another is the risk of a US-led recession,” said Peter Branagh, chief investment officer at ABRDN. But looking at the risks holistically, he sees slower but still positive U.S. economic growth, inflation near central bank targets, a global rate-cutting cycle, and a higher level of Chinese stimulus. There is a tentative view that there is a transition to
“In terms of opportunities, both stocks and bonds have performed well so far this year, but the fundamentals for corporate earnings continue and we believe holding periods have merit given the risks. “We are tactically overweight the US dollar as there are positives and we see a 50-50 split in the US presidential election,” Branagh added.
stock
Active efforts toward monetary easing and the realization of a soft landing should support corporate risks. Recent earnings seasons have seen positive revisions, and earnings growth extending to cyclical sectors should support prices. Although U.S. stock valuations are rising, Abdon believes tech stocks’ high returns, strong free cash flow generation and strong balance sheets set them apart from past bubbles.
The asset manager also pivoted to a slightly more positive view of emerging market (EM) stocks. There is a gradual change in the extent of China’s policy easing, which could lead to significant price increases in Chinese stocks. However, sustained support will be needed to offset the structural headwinds from real estate.
bond
abrdn remains positive on duration, demonstrated through an overweight in global government bonds and emerging market local currency bonds. However, confidence in emerging market municipal bonds was lowered to reflect the extent of the strength in duration markets and emerging market currencies, as well as the risks posed by the Trump presidency.
Interest rates have fluctuated over the past quarter, so duration may be tactically neutral at this point. However, a 12-18 month period increases the risk of a recession, so it is wise to maintain a certain amount of time.
real estate
abrdn raises its view on global direct real estate to positive, with listed properties found in regions such as the UK and Europe, with sectors such as residential, hotels, student accommodation, data centers and logistics being the most attractive. I am.
Significant valuation corrections are occurring in the global property market, particularly in the UK and Europe, and in the office sector. However, this process now appears to be nearly complete. Real estate yield premiums are attracting capital back into the sector, especially as policy interest rates are lowered. Supply constraints are also supporting rental value growth as occupiers consolidate into future-friendly properties.
playing card hedge
abrdn recognizes that the US election is a significant risk to the global economy and has analyzed various US election scenarios to understand how different election outcomes are likely to impact asset prices and portfolios. I’m trying to understand what’s going on.
As a result, the firm became tactically overweight the dollar in the run-up to the US presidential election. In his base case for a soft landing for the economy, Abdoun expects the dollar to depreciate moderately over the medium term. But if Trump wins, the dollar is likely to rise and hedge losses on other positions.
macro
The asset manager expects a soft landing for the global economy and is less concerned about the risk of inflation overshoot caused by low unemployment and strong wage growth.
To be sure, there are still some factors that pose an upside risk to global inflation, including soaring oil prices and disruptions to global supply chains related to escalating tensions in the Middle East.
But despite the soft-landing criteria, the U.S. economy is slowing, with interest-rate-sensitive sectors like manufacturing and housing struggling and fiscal appetite waning, the company said. This slowdown could turn into a more harmful recession.
This economic backdrop explains why abrdn expects the global rate cutting cycle to persist and continues to judge that global equilibrium interest rates will remain relatively low at around 2% to 3% in nominal terms. However, although there is considerable uncertainty about this determination, many of the structural factors that lowered equilibrium interest rates before the start of the pandemic remain prevalent. The recent sharp slowdown in nominal growth also suggests a tight policy stance. As such, Abdon believes there is considerable scope for a global rate-cutting cycle before rates return to a more neutral setting, rather than a stimulative stance.
