Interest rates, geopolitics and the rise of artificial intelligence (AI) are among the issues that dominate the thinking of fund managers at the mid-way point of 2024. 

Most remain cautiously optimistic that the risk of recession remains limited, even though global growth is likely to soften, and that interest rate cuts are likely to roll out from later this year.

AI is expected to continue to reshape industries, though not necessarily at the pace many pundits appear to anticipate. In fact, the surge in the market value of big tech stocks appears to have opened up opportunities in other sectors or geographies that have lagged as the former posted new highs.

These include biotech companies, Japanese companies, global small caps and emerging market equities, among other areas.

The views of three fund managers about the global outlook and impact on financial markets is outlined in more detail below.

Piers Bolger, Chief Investment Officer, Infinity Asset Management

Our latest analysis highlights a continued upward improvement in the forecast return and yield metrics across the majority of asset classes as global central banks come to the end of their cash rate tightening cycle. 

Nevertheless, while inflationary expectations have passed their high point, the lead time and path for inflation to reach central bank target levels will be longer and more volatile. We expect that a broader downward move in cash rates will occur from the second half of 2024 into 2025 for many regions led by the US Federal Reserve in the third quarter of this year. In the avoidance of a broader global recession, this does provide a backdrop that can continue to support higher asset prices, despite an economic environment where both global growth and labour markets continue to soften. 

Our forward looking view of financial markets as well as the global economy is one of cautious optimism. 

We see the opportunity in those parts of the market, that have not enjoyed the same level of performance of the major bourses and can benefit from future declines in global cash rates. This includes the more cyclical and interest rate sensitive parts of the market as well as those sectors that are leveraged to a broader economic recovery. 

While this shift still has time to play out in our view, it is clear from our recent analysis, that it is happening with an improving return outlook for these sectors (ie small caps and REITs). This is reflective of a market environment where valuation declines are now providing an attractive entry point to add exposure, consistent with an earnings outlook that is also improving. 

We see a more sanguine outlook for cash based and some bond market investments, particularly Treasury markets. 

With ongoing moderating inflation and a reasonable outlook for economic growth, combined with credit default rates that remain consistent with longer term averages, we continue to view credit as providing the most attractive return profile for fixed income markets. 

The three key themes that we see shaping financial markets both in the near and medium term, are higher cyclically based inflation, the ongoing energy transition to net zero and the prevalence and growing importance of artificial intelligence (AI). While inflationary expectations and the energy transition have been impacting financial markets for some time, the rapid development and impact of AI will have a demonstrable impact on every facet of individual lives and by consequence, financial markets, as we move through the rest of the decade and beyond. 

Ronald Temple, Chief Market Strategist, Lazard 

Through the second half of the year, I expect:

• US growth and inflation to decelerate, allowing the Fed to cut rates in the second half of 2024
• A razor’s-edge US election with significant economic and market implications
• China’s housing challenges to persist, but with the cumulative effects of stimulus lifting growth
• Eurozone disinflation to allow the European Central Bank (ECB) to ease policy materially in 2024, adding additional momentum to already-accelerating growth
• Japan’s inflation normalisation to persist, leading households to reassess asset allocation
• Western resolve to defend industry against Chinese competition to stiffen, adding to elevated tensions over China’s support for Russian aggression in Ukraine.

In my view, the tech-AI juggernaut can only be sustained if the customers buying these goods and services realise a return on investment. Put simply, CEOs and CFOs of large companies will not just continue to pour money into AI investments if there is no evidence that the capital deployment is paying off. 

I believe 2024 is too early to see these returns in earnings or profit margins, but 2025 is not. As investors look ahead, I expect to see a broadening of the equity market rally driven by better earnings growth outside of the technology sector. Importantly, this broadening does not mean that tech and AI stocks stop working. However, the gap between the tech leaders and the rest of the market would likely narrow, if not reverse, as investors realise that the rest of the market has largely stagnated for over two years and now offers more attractive return potential.

Non-US markets are trading on much less demanding valuation multiples and are likely to benefit from accelerating growth while US growth decelerates. Moreover, non-US companies typically are more exposed to floating-rate debt, which should benefit them disproportionately as the ECB and other non-US central banks ease before the Fed. Finally, non-US companies also could enjoy a more significant recovery in revenue and earnings from current levels as their economies were less resilient after the pandemic than the US economy, which benefited from much larger fiscal and monetary stimulus.

My view is that the best approach is to allocate capital away from cash to riskier assets while identifying those “risky” assets that are less correlated to the most expensive parts of the global equity market (e.g., tech and AI leaders) and instead invest in areas of the market that have more unrecognised upside going forward. These include emerging markets, Japan, small cap, and infrastructure-related equities.

Marc Pinto, Head of Americas Equities and Lucas Klein, Head of EMEA and Asia Pacific Equities, Janus Henderson Investors

Although the first half of 2024 was surprising in many ways, it has highlighted opportunities around valuation and underlying business fundamentals. Both could come into sharper focus over the next six months as investors reckon with ongoing inflation measures, central bank policy moves, geopolitical tensions, and uncertainty around the US election.

However, we remain encouraged by the outlook for equities and believe the potential for shareholder value has grown more compelling across several areas of the global market.

Artificial intelligence (AI) remains one of the biggest narratives in 2024. This year, however, the trend has started to evolve, with only five of the Magnificent Seven mega-cap tech stocks that rocketed into the stratosphere last year, growing in 2024.

Meanwhile, other stocks are starting to catch what looks like an AI tailwind.

We think the value of second-derivative AI players will begin to rise. That includes the entire semiconductor ecosystem (from makers of advanced chips to semiconductor equipment manufacturers), companies that offer sustainable water management systems for data centres, energy and electric component suppliers. While these firms may not capture the same headlines as mega-cap tech, AI’s impact on their earnings streams could be no less meaningful.

Outside the tech sector, we continue to think investors should focus on high-quality firms whose growth is not dependent on the economic cycle, can generate strong free cash flow, and have reasonable debt levels.

Today, we think one sector that offers many of these attributes is healthcare. After a multi-year bear market, many biotechnology stocks still trade below the value of cash on their balance sheets. Meanwhile, the broader healthcare sector’s (S&P 500 Health Care Sector) total return lagged the S&P 500’s by more than 20 percentage points in 2023, suffering from a sharp slowdown in COVID-19-related product sales.

And yet, the healthcare sector is ripe with innovation. Last year, the US Food and Drug Administration approved a record 73 novel medicines. These drugs are now beginning what will likely be a 10-year revenue cycle, including in new end markets with multibillion-dollar sales potential. Recently approved GLP-1 drugs for diabetes and weight loss, for example, are already annualising more than $30 billion in revenue and are forecast to reach roughly $100 billion in sales by the end of the decade.

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