The first half of 2024 transformed from market fears of a recession to optimism over stronger-than-expected economic growth. Disinflation and the path of interest rates will continue to drive the investment environment, but political risks, notably the US elections and geopolitical competition, will also play a significant role, resulting in episodes of market volatility.
As we enter the second half of 2024, the investment landscape presents a contrasting picture: a moderately healthy macroeconomic backdrop with equities hovering around record highs, contrasted against rising geopolitical risks. In this environment, how should investors navigate the challenges and opportunities ahead? Here are our 10 strongest investment convictions for H2 2024.
1. Maintain a neutral portfolio risk stance
Given the geopolitical risks in H2, we recommend a neutral stance on portfolio risk. While our macroeconomic outlook is constructive, maintaining portfolio diversification is crucial. Episodes of risk aversion may trigger temporary drops in high equity-bond correlations, necessitating balanced exposure to high-quality bonds while remaining poised to invest in other risk assets as opportunities arise.
2. Prefer high-quality bonds
Fixed income remains an attractive source of income and portfolio stability. With interest rate cuts expected to extend as inflation falls in H2, we foresee modest capital gains in fixed income. Our preferred investments include German Bunds, UK gilts over US Treasuries, and European investment-grade credit. We also see value in selected ‘crossover’ corporate bonds and emerging market credit.
3. Seek opportunities for carry with selected bond exposures
Amid political risk and the start of the US presidential election campaign, volatility may remain elevated. Despite tight spreads, opportunities for carry returns in corporate credit may arise. We favor EUR-denominated investment-grade bonds on a dollar-hedged basis and select ‘crossover’ credit. Additionally, emerging market hard currency corporate bonds offer better diversification and higher rating quality.
4. Favor cyclical stocks
Equities are expected to offer more upside than bonds over the course of H2, supported by high-single-digit earnings growth and rate cuts. We see opportunities in cyclical sectors such as energy, materials, consumer discretionary, and communication services. Sector preferences may evolve based on US election outcomes.
5. Invest in lagging regions and sectors
Fairly priced markets that have lagged in performance offer growth potential. The UK stock market, with reasonable valuations and decent earnings growth, is a key focus. We also highlight select emerging markets like Taiwan, South Korea and India for their growth exposure. Conversely, the eurozone remains less preferred due to political uncertainty and weaker earnings prospects.
6. Enhance portfolio resilience with thematic equity exposures
For investors keen to build more portfolio resilience and capture longer-term growth drivers, our thematic equity framework offers new opportunities. This builds on our analysis of fundamental transformations underway in our economies and societies – from changes in longevity, demographics, infrastructure, and the sustainability transition – and seeks to capitalize on the listed equity opportunities that flow from them. Investors willing and able to withstand some short-term volatility in this portion of their portfolios can build exposure to our preferred thematic stocks.
7. Expect continued US dollar strength
The US dollar is likely to remain strong due to its yield advantage and relatively weaker growth outside the US. Although US political risks and a multi-polar world raise doubts about long-term dollar strength, the USD is expected to appreciate against the euro and sterling in H2. The dollar’s strength also helps diversify portfolios.
8. Anticipate solid gains in commodity prices
Demand for natural resources will increase amid geopolitical uncertainty and the transition to a net-zero economy. Industrial metals, particularly copper, face new structural demand from electrification and AI-driven data centers. Gold remains important as a reserve asset for central banks. We expect commodity prices to rise, with bouts of risk aversion offering opportunities to rebuild exposures.
9. Diversify with alternative strategies
Alternative investments, including Swiss real estate funds and hedge fund strategies, can provide income and diversification. Event-driven and long-short equity strategies offer opportunities amid corporate activity and a normalizing macroeconomic environment. These strategies can enhance portfolio returns and diversification.
10. Strengthen portfolios with private assets
For long-term investors, private assets can enhance portfolio returns, lower volatility, and improve diversification. Private investments offer access to innovative companies and play a valuable role in multi-asset portfolios.
While economic health and central bank policies will continue to drive financial markets through the rest of 2024, political events will intermittently steer the course. By maintaining a balanced approach and capitalizing on opportunities, investors can navigate the complexities of H2 2024.
Dr. Nannette Hechler-Fayd’herbe is Head of Investment Strategy, Sustainability and Research, CIO EMEA at Lombard Odier.
Dr. Luca Bindelli is Head of Investment Strategy, Lombard Odier.
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