Quarterly Market Outlook: Q2 2024

In the first quarter of 2024, analysts have been surprised on the upside as economic momentum is improving in major countries such as the United States, India or Mexico. The dynamics of this cycle are corroborating the soft landing narrative although the rising momentum was not felt everywhere, with notably subdued growth in the euro area. The counterpart to the improvement in economic sentiment is the increased persistence of inflation. This context of lower recession risk and greater doubts about achieving the 2% inflation target would make central banks rethink the urgency of initiating cuts. We assume a smooth adjustment cycle also in the evolution of interest rates towards neutral levels.

This macroeconomic and financial scenario provides a favorable scenario for rebalancing investment portfolios. Conservative investors have alternatives to generate real returns with a low level of risk and can balance attractive yields in a diversified way and implement hedging strategies. Investors with longer investment horizons can complement the safety of fixed income returns with the potential for cyclical earnings recovery in listed equities, the attractiveness of private markets and innovation themes.

01. Definitely a soft landing

Despite high interest rates, growth data has held up and the risk of recession has diminished. However, this positive economic momentum is concentrated in a few regions, notably the United States. European economies may also avoid recession, but growth remains anemic.

In the emerging bloc, China is expected to grow close to 5%, but the real estate sector remains a drag. Other economies such as Mexico and India are improving their outlook thanks to business investment and more specific issues such as nearshoring.

2024 growth estimates / Source: Bloomberg Consensus of Economists. Data as of 3/31/2024

02. Disinflation at two speeds

Central banks cannot claim victory over inflation, but progress may be sufficient to allow them to begin to reduce monetary pressures. Persistent price pressures in the services component will make it difficult to stabilize inflation at 2%, but we expect a gradual return of interest rates to neutral levels in almost all regions.

We have lowered our expectations for rate cuts in 2024, as central banks may remain cautious until wage pressures ease.

Good and Services Inflation Trend / Source: Bloomberg. Data as of 3/31/2024

03. Focus on earnings recovery

The resulting environment of economic slowdown and moderate interest rate tightening provides a favorable backdrop for all types of investment strategies. Investors with a greater focus on minimizing risk can combine the high returns of short-term fixed income positioning with options to extend the opportunity to longer maturities through longer duration bonds, credit risk premiums on high quality corporate bonds and diversification into more complex fixed income strategies.

Investors with a longer investment horizon can combine the more predictable returns of fixed income with the potential earnings recovery of equities and the growth of innovation themes.

Expectations for earnings growth in the US (S&P 500) and Europe (Stoxx 600) / Source: Bloomberg. Data as of 3/8/2024

An optimal environment for investment

We are in one of the best investment environments in recent decades when we analyze the conclusions of our analysis of the growth, inflation, interest rate and fundamental environment (risk premia, valuation, earnings performance, etc.) in terms of investment portfolio construction. 

To maximize portfolio diversification, protect against market shocks and extend the return horizon, investors should keep in mind to position themselves in long-term themes (artificial intelligence boom, energy transition, biotech, among others), private markets and hedging assets (with safe-haven currencies and gold offering value in an environment of potential geopolitical disruptions).

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