The main economic outlook that underpins Lombard Odier’s house view is still that of a soft landing, where there will be a moderate economic slowdown following a period of growth, says Lee Homin, senior macro strategist at the Swiss private bank, for its 2H2024 investment outlook briefing.
In addition to the US exceptionalism in the growth outlook for 2024, Lee highlights that other economies are now joining the crowd. The Eurozone has seen a 1% growth, above consensus expectations, while China has seen “a bit” of stabilisation in numbers.
Lee: We expect inflation numbers in the US to go down after seasonality issues in 1H2024, which gives the Fed a good enough context to start cutting rates. Photo: Lombard Odier
As decoupling between the US and China continues, the figures show that there is still a recovery in trade, something Lee describes as “somewhat encouraging”.
Despite the US Fed’s decision to keep its interest rates higher for longer, Lombard Odier sticks to its two to three rate cut predictions for the 2H2024, beginning in the “best case” scenario in July, or by September at the latest.
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Lee expects the US Fed to stop at 3.5%, which is assumed to be the neutral rate for the US. The economist looks at several indicators which have led to this rate cut prediction — core inflation is gradually moving toward 2%, which is driven by a slightly stronger-than-expected employment cost index in the US.
Underlying core inflation is gradually moving torwards 2%. Photo: Lombard Odier, Bloomberg
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Although wage growth, payroll numbers and average hourly earnings have decreased, private-sector indicators are decelerating due to President Joe Biden’s administrative policy on immigration which have helped to rebalance inflation.
Citing the Federal Open Market Committee’s meeting on May 1, Lee notes that the hurdle to raise rates is very high, and the committee is biased to cut rates if they get the signs that inflation is coming down, or if there are some weaknesses in the labour market.
“But we do think inflation numbers in the US will go down after the seasonality issues in the first quarter, and that means they have a good-enough context to start cutting down,” says Lee.
Meanwhile, following the Bank of Japan’s decision in March to implement interest rate hikes for the first time in 17 years, Lombard Odier believes that it is quite likely there will be two additional hikes to follow. Lee says that this will happen between July and December, a move to anchor the yen before the US Fed takes action in the second half of the year.
Finally, the economist highlights China’s renminbi-based financing as an important topic to watch for the 2H2024. The People’s Bank of China has kept its currency at a stable rate for the last few months to prevent a vicious cycle of capital outflows and exacerbated losses.
“Our guess is they are serious about the renminbi stability, and they’ll continue to defend at RMB7.3 versus US$1, but there will always be that discomfort around the currency topic because it’s inconsistent with the reflationary efforts,” says Lee.
The private bank underscores three scenarios that will shape the 2024 to 2025 global outlook for markets. The first is a 70% probability of a soft landing, which will materialise from sufficient conditions for rate cuts without a recession, causing a disinflationary boom with a range-bound US dollar path.
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The second is a 20% probability that a second wave of inflation will lead to central banks underreacting for political reasons, and an inflationary boom amid substantial US dollar weakness.
Lastly, they see a 10% probability that a second wave of inflation will trigger central banks to “aggressively” fight back, and a hard-landing amid historic US dollar strength.
Alternatives to equities
With this macroeconomic backdrop for the 2H2024, John Woods, Lombard Odier’s chief investment officer, head of investment solutions, Asia, sticks with the bank’s 45%–45%–10% allocation, with the final 10% allocated to commodities.
Woods: Expect softer gains around mid to low single digits for equities in 2H2024; go overweight on fixed income. Photo: Lombard Odier
Ahead of the US presidential election in November, Woods says that historically, investors have been unwilling to take a convicted position in equities ahead of an election due to the different preferences each party candidate has for policy and subsequently, sectors.
Compounded with the fact that the S&P 500 has performed “very strongly until a few months ago”, Woods believes that most of the positive gains in equities are now behind us, giving rise to uncertainty in the equities market. “I think in the second part of this year, we’re going to see softer gains, probably mid to low single digits,” he adds.
Photo: Lombard Odier, Bloomberg
Taking the P/E ratio of the S&P 500 over time, Woods highlights that at present, the market is trading around 22 times, higher than the commonly traded 14 times, a sign that valuations are higher.
He notes that while this is likely to endure, the positive news about the American market is that it is broadening and there has been greater focus on some of the value sectors away from pure growth. These include communications, energy and consumer staples, three sectors that Woods has been promoting to clients.
Globally, the MSCI World ex-US index is more fairly valued with a P/E in the middle of the curve at 13 times, says Woods. But while there are emerging opportunities that investors can explore away from US exceptionalism, Lombard Odier remains positive on the US in the above three sectors.
Bond returns still attractive versus equities. Photo: Lombard Odier, Bloomberg
On that note, the private bank notes that the S&P 500’s earnings yield is now matched by corporate investment- grade bonds, broad-based treasuries and short-dated treasuries, all yielding around 5%–6%.
“You’ll recall for many years, a decade even, that there was this sense among investors that there was no alternative to equities,” says Woods. “But the chart here makes it clear that there are now alternatives.”
The chief investment officer is therefore neutral on equities and overweight on fixed income.
Finally, on the subject of the US dollar, Woods believes that interest-rate differentials between the US and Europe are likely to support the dollar, particularly for the 3Q2024.
He attributes his belief again to investors not wanting to “swing the bat” or take convicted positions during the election year. Therefore, the dollar is likely to remain reasonably range-bound and well-supported at these levels.
