Analysis from Peter Branner, Chief Investment Officer, abrdn, reveals positive House View on equities and fixed income, given a solid economic outlook, an expectation that interest rate cuts are coming, and secular support from the tech sector.
The economic base case is for a US soft landing with slowing but still positive growth. While there are plenty of risks, inflation should decline gradually further towards central bank targets. We think this will allow an increasing number of central banks to begin rate cuts this year. Recent central bank communication supports this expectation, and the House View is long duration both in sovereign and corporate space, including emerging market debt.
The House View is positive on developed market equities because of the positive probability-weighted economic outlook and a view that the performance of the ‘Magnificent 7’ stocks is underpinned by fundamentals. But these stocks have already had a large run up, so there is important differentiation among the Mag 7 on our analyst recommendation list.
The negative adjustment in global direct property markets is close to completion, so the House View has moderated its negative signal, and expects to move neutral and even positive in time. The House View prefers thematic real estate exposure to living, distribution, healthcare and technology sectors.
The House View is neutral in its dollar view, with conflicting drivers from near-term US growth exceptionalism and carry, set against an expectation of moderating US growth later this year.
Inflation – the last mile of lowering inflation may be the hardest, but this won’t stop central banks cutting rates
Global inflation has come down rapidly over the past 18 months, in many cases without a significant hit to economic activity. However, the recent spike in inflation in the US and many other economies has raised fears that the last mile will be harder.
There is plenty of historical precedent for progress in lowering inflation to stall or even reverse. This may reflect second-round effects, higher inflation expectations, exhausting the easy gains from base effects, and inflation persistence in the services sector. The 1970s experience, which combined multiple energy shocks with policy that was never tight enough, weighs heavily in the mind of central bankers.
However, tight monetary policy across developed and emerging markets should continue to exert downward pressure on inflation, even if progress is likely to be slow and bumpy over comings months. We expect US core inflation to grind lower to around 2.5% by the summer, helped by goods price deflation, easing shelter inflation and a slow moderation in wage growth. This should open the door for the Fed, ECB and Bank of England to start easing in June.
That said, some slippage in this timing would not be surprising, especially should there be further upside surprises in inflation, accompanied by robust growth. And in the longer term, inflation volatility may be structurally higher as the global economy appears more exposed to negative supply side shocks.
Geopolitical hotspots – the US election is the crucial driver for Ukraine, the Middle East, and Taiwan
The war in Ukraine is likely to remain in broad stalemate this year. The next inflection point will be the US election, with a potential Trump presidency increasing pressure for a ceasefire. European security risks posed by Russia may put upward pressure on defence spending.
The Taiwanese election did not materially alter the outlook for cross-strait relations. The key risk to the status quo is the credibility and sustainability of US strategic ambiguity. A Trump presidency would raise risks the US abandons this policy and reduces its focus on Taiwan.
There is still a risk of conflict spillover in the Middle East, which could worsen shipping disruption in the Red Sea and in more extreme scenarios put considerable upward pressure on oil prices. This is one reason why the positive duration signals in the House View are modest.
