More than 145 abrdn clients from around the world recently gathered in Central London to listen to what some of our most senior people had to say about the shifting economic landscape.
We didn’t offer a map to buried treasure, but what we did do was remind everyone that even as we’re grappling with uncertainty – Have we beaten inflation? Is China on the mend? Who will be running the US next year? – investors do have options.
abrdn Chief Investment Officer Peter Branner led a group of esteemed experts, including Global Head of Multi-Asset and Alternative Solutions Russell Barlow, Global Head of Real Estate Anne Breen, Chief Economist Paul Diggle, Global Head of Equities Devan Kaloo, and Global Head of Fixed Income Craig MacDonald, in a discussion on what a shifting landscape means to each of them.
Most importantly, given our macro views on what could happen over the next 12 months, our panelists offered top tips on the most attractive investment opportunities in their respective asset classes. Here are the edited highlights of that discussion:
A shifting landscape
Inflation
Inflation pressures re-emerged earlier this year in the US and elsewhere, but we expect them to moderate on a month-on-month and quarter-on-quarter basis. This will give central banks room to cut interest rates further, and we see a gradual easing of monetary policy around the world this year. That’s one reason why, at the highest level, the House View favors both fixed income and equities. However, there are risks to this forecast on several fronts, including geopolitical uncertainty.
China
China faces significant challenges. The property sector remains troubled and consumer confidence is low. Its population is aging, and another Trump presidency would further strain relations with the US. However, the talk of slipping into the middle income trap ignores the speed of technological innovation occurring in China. Comparisons with Japan’s Lost Decade of deflation are off target. There are also signs that government stimulus is working, putting the economy on a trajectory to meet this year’s around 5% growth target.
The US presidential election
A Biden-Trump rematch in the US election later this year promises very different outcomes. The incumbent, Joe Biden, must battle negative voter perceptions of US economic conditions. If he succeeds, we can expect broad policy continuity. His opponent, who is marginally ahead in the opinion polls, would create more uncertainty. Donald Trump’s stated tariff, fiscal, regulatory and immigration objectives, if pursued, risk driving inflation back up.
Structural changes
Looking further ahead, we need to reassess some long-held assumptions because of structural changes in the global economy. Expect to see higher inflation volatility due to supply shocks caused by geopolitics, climate change, and even future pandemics; no return to negative interest rates; globalization shifting towards industrial policy and supply-chain security; and transformative change from artificial intelligence.
Table 1. abrdn house view
Source: abrdn, June 2024. The views expressed should not be construed as advice or an investment recommendation on how to construct a portfolio or whether to buy, retain or sell a particular portfolio investment.
What’s the investment opportunity?
Peter challenged the global heads of asset classes to distill their views into a handful of high-conviction investment ideas. Here’s what our experts came up with:
Fixed Income
- Emerging markets will do well if our base case scenario – inflation and interest rates come down, and the global economy normalizes – plays out. Duration makes sense.
- If worried about sticky inflation – short-duration credit makes sense because corporate balance sheets are good and bond yields are high.
- Contrary to popular demand, you can have variations between the two views depending on an investor’s risk appetite. But do expect volatility over the next 12 months.
Equities
- Thematically, we like the intersection between technology and climate change. There are interesting things going on in electrification. Similarly, with the rise of artificial intelligence.
- Geographically, we like Europe (including the UK). Interest rates will come down, and these markets should recover. Most importantly, there’s a shareholder-return story happening at the company level in both markets.
Multi-Asset + Alternatives
- Downside protection on risk assets looks attractive right now. Put options on the S&P 500 are one expression of this observation. Equity volatility is at historical lows. When coupled with high interest rates, this means the pricing of so-called 'out of the money' options is very attractive.
There's a lot of support for the view that the US economy will achieve a soft landing. However, if investors are worried about geopolitics or feel the soft landing narrative is fully reflected in market prices, buying protection via derivatives would be a cost-effective way to hedge those risks. The cost of protection on individual stocks remains high but given the stock concentration within the S&P 500, it's a very efficient way to hedge the risks posed by the biggest US technology companies. - Gaining passive exposure to hedge funds gives you a more economical way to access the industry return and to express top-down strategy and sub-strategy views. We believe equity-related strategies and some of the asset-backed strategies within the fixed income space, look attractive.
Important information
Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed, and actual events or results may differ materially.
Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.
Fixed income securities are subject to certain risks including, but not limited to: interest rate (changes in interest rates may cause a decline in the market value of an investment), credit (changes in the financial condition of the issuer, borrower, counterparty, or underlying collateral), prepayment (debt issuers may repay or refinance their loans or obligations earlier than anticipated), call (some bonds allow the issuer to call a bond for redemption before it matures), and extension (principal repayments may not occur as quickly as anticipated, causing the expected maturity of a security to increase).
Alternative investments involve specific risks that may be greater than those associated with traditional investments; are not suitable for all clients; and intended for experienced and sophisticated investors who meet specific suitability requirements and are willing to bear the high economic risks of the investment. Investments of this type may engage in speculative investment practices; carry additional risk of loss, including possibility of partial or total loss of invested capital, due to the nature and volatility of the underlying investments; and are generally considered to be illiquid due to restrictive repurchase procedures. These investments may also involve different regulatory and reporting requirements, complex tax structures, and delays in distributing important tax information.
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