Quarterly Investment Outlook – Q2 2024

The rally was spearheaded by US technology companies, mainly Nvidia which saw its profits explode and Meta, which announced its first dividend. However, other markets followed, with Europe catching up and the Japanese Nikkei rallying breaking a previous all-time high level achieved in 1989.  

The equity rally, while fairly broad-based, is not backed by solid fundamentals. Valuations in the US are on the expensive side, while in Europe less so, but still higher than average. In the UK equities appear to be cheaper, but it is the only DM market that hasn’t rallied significantly in the past few months. Meanwhile, risks are building up, mostly around Commercial Real Estate, worsening bank balance sheets and fickle Geopolitics (which could start another inflation wave).  

Bond markets have been more sanguine and the bond rebound –following an annus horribilis in 2022- remained unfinished. For the year, bonds are down 1.9%, after a 9% rally in November and December. This happened mostly due to a correction in rate expectations. Falling inflation and dovish comments from the Fed in late October sparked a bond rally (along with equities). However, as the US central bank began to reign in expectations, returns fell again. The most important point is that the fixed income, the “safer asset” in portfolios remains volatile, cast adrift after years of curation by central banks.  

As equities rally so does Gold (a safe haven) and Bitcoin (a bellwether of ultra-positive sentiment). Part of gold’s movement can be explained, by increased demand from both Asian central banks and Asian consumers. The Bitcoin rally, on the other hand, is possibly a symptom of wider euphoria in the tech sector.  

Going forward we would remain sanguine. Lack of sound fundamentals, like significant earnings expansion, sharp rate cuts or the end of QT suggests that the equity rally should be approached with a modicum of caution. While bonds are weak and have been weaker on stronger inflation data, we don’t see the potential for another 2022-type bust.  

Key risks going forward include a negative inflation surprise (possibly induced by further and as yet unpriced geopolitical shocks). Another important risk comes from bank balance sheets. Large banks are sitting on top of high unrealized losses (which means they can’t afford many outflows) while more local US and large European banks are exposed to worsening commercial real estate conditions. Meanwhile, the Basel III requirements coming at the beginning of the year are already stressing their balance sheets.