Julian Howard, GAM’s Chief Multi-Asset Investment Strategist, outlines his latest multi-asset views, exploring how the US is becoming increasingly immune to the world’s mounting geopolitical and economic challenges, despite contributing to them.
16 July 2024
Review
Global equities, as measured by the MSCI All Country (AC) World Index, posted a robust +3.5% gain in local currency terms in the second quarter of 2024. One of the strongest and perhaps most surprising returns of the quarter came from Chinese equities as measured by the MSCI China Index which made a decent recovery (+7.2% in USD terms) after a prolonged period in the doldrums amid on-going consumer caution, real estate woes and the possibility of a disadvantageous trade war. Some limited moves by the authorities there to ease the burden of real estate bankruptcies at the local municipal level, along with slightly more conciliatory language on trade policy, appeared to support this most depressed of markets, at least temporarily. This helped emerging market (EM) equities more broadly, but it should be noted that the strong US dollar remained a headwind for these stocks as the US Federal Reserve appeared reluctant to loosen monetary policy too quickly as headline inflation failed to dip below the mid-3% level. Notably, Japan’s currency spiralled, with the authorities torn between being forced to intervene to prevent an imported inflation spike while also wishing to avoid tightening monetary policy amid weak economic growth.
None of this deterred the technology-led US megacaps whose rally continued apace, with the S&P 500 and Nasdaq 100 indices up +4.3% and +8.5% in USD terms respectively as the artificial intelligence (AI) phenomenon trumped all else. That the US stockmarket’s final numbers for the quarter were not even stronger reflected some profit-taking by investors in Nvidia stock whose performance had moved into parabolic territory in the preceding weeks. The Russell 2000 Index of mid-cap stocks meanwhile was left in the dust, floundering for answers amid a dearth of technology names and an inability to access cheap capital in the way that its large cap equivalents enjoyed. The US election campaign meanwhile dragged on in undignified fashion, with former President Trump found guilty on 34 felony counts in a New York court but later helped by a faltering debate performance by President Joe Biden in late June which helped ensure the former’s lead in the RealClearPolitics (RCP) Average of polls as at 28 June.
Across the Atlantic, Europe’s markets could not escape their own political turmoil, with the CAC 40 Index in France dragged into negative territory on the back of tough European election results for France’s moderate parties and then a disastrous first round of a snap parliamentary election in which the right-wing Rassemblement National (RN) came within touching distance of power. France’s very financial sustainability was called into question, with its 10-year OAT government bonds hitting an excess yield over the equivalent German bunds of over 0.8% on the 27 June.
A clear trend seems to have emerged during the second quarter of the year; while many of the world’s key economies and markets faced political extremism and stagnating growth, the US seemed completely oblivious amid a strong consumer, improving productivity and the unique role its corporations are playing in fuelling the AI revolution.
Chart 1: Fiscal deficits threaten to radicalise Europe:
Government structural balance, % of GDP as at 16 Apr 2024
Source: IMF World Economic Outlook.
Government structural balance is the difference between revenues and expenditures adjusted for the economic cycle and one-off shocks.
Government structural balance is the difference between revenues and expenditures adjusted for the economic cycle and one-off shocks.
Positioning
We saw no need to change our investment views significantly during the second quarter, as we seek to take advantage of the superior real returns that stocks can offer over time, offset by sensible diversifying exposures, sized correctly according to each investor’s long-term risk appetite. We remain broadly engaged in equities given the aforementioned tailwinds the US market enjoys, combined with the fact that it dominates global equity indices (66% of MSCI AC World). Our starting point in equities is simple, transparent exposure to global stocks in the form of index funds, thematic groupings of direct securities or carefully selected active security selection managers as we see appropriate. In regional terms, our emphasis is unashamedly on the US versus most other markets. While we take a more ‘neutral’ view on EMs and accept the long-term opportunity in China, we also note the potential disruption from trade wars, geopolitical risks including around Taiwan as well as structural economic challenges in the world’s second-largest economy. As such, we have taken advantage of the limited stabilisation described in the Chinese stockmarket to reduce our interest there, instead favouring liquidity in the short term. We are also less enthused with Europe given the increasing political turbulence and the way that said turbulence is driving market volatility in a way that it simply is not in the US.
Away from stocks, we continue to see value in short-dated government bills across the main currency classes given the unbeatable risk-adjusted returns versus nearly all other alternatives. Our interest in longer-dated government bonds also serves as additional ‘crash protection’ in the event of an extreme geopolitical or market event while also offering the prospect of capital appreciation given already high yields. For example, the 10-year US Treasury bond offers a relatively high (by the standards of the last 15 years at least) yield of 4.4% as at the end of June. The appeal of these risk-free assets is complemented by selective interest in insurance-linked securities, mortgage-backed securities, ultra short-dated investment grade bonds and well-researched subordinated financial bonds. We see scope to potentially include further corporate bond structures in the coming months. Finally, in tactical terms, we continue to view US Treasury bills partly as a defence against the possibility of a market correction but also as a means of keeping the powder dry for re-engaging in stocks in the aftermath of such an event.
Chart 2: Done boomin’ well – US consumers have been enjoying positive real wages
From 31 Mar 2007 to 31 May 2024
Past performance is not an indicator of future performance and current or future trends.
Source: Bureau of Labor Statistics
Source: Bureau of Labor Statistics
Outlook
The key question today is whether America’s exceptionalism can endure. The most obvious challenge to it is the forthcoming Presidential contest in November given today’s fraught and divided culture. A cursory glance on X at postings from leading commentators on both Left and Right reveals a depressing lack of willingness for moderation or compromise, an intransigence that is only fuelling this most bitter of electoral battles. History provides a degree of solace for worried investors who connect political turbulence with poor market returns (an unclear relationship at best). Past US presidential elections have generally not affected outcomes for the S&P 500, except in extremis. The 2000 Bush / Gore election in the middle of the 1990s technology boom unwind and the 2008 Obama / McCain contest in the middle of the global financial crisis in particular come to mind. But during otherwise ‘normal’ economic times, the S&P 500 has been relatively stable in the aftermath of every election since the early 1990s. Today, with a strong consumer, improving productivity and good corporate profitability (with the prospect of even better earnings from here) we sense that the US stockmarket will be able to remain focused on market fundamentals in the coming months. It is true that the US budget deficit at nearly 6% is probably unhealthy and if you squint hard enough you can even start to see cracks in the consumer story too in areas such as non-mortgage debt accumulation. But the US enjoys unique financing and currency privileges which other regions generally do not. The confers significant relative advantage during these troubled times.
Indebted parts of Europe, given the bloc’s lack of fiscal and banking union, will struggle to deal with unmanageable and unforeseen spikes in its financing costs as bond investors probe for signs of fiscal irresponsibility. The UK is also broke but a new Labour government – assuming it does not resort to enterprise-crushing tax rises – cannot hope to grow its way out of the fiscal hole until its productivity problem is definitively solved. Meanwhile, EMs will have to contend with not just the China-specific risks mentioned but also the prospect of a strong US dollar as monetary policy there continues to make America a haven for global flows of capital. As surprising as it may seem given the sheer diversity and growth of the world ex-US’s economic and market ecosystem in recent years, the prospect of yet another American decade looms large.
Important disclosures and information
The information contained herein is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained herein may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information contained herein. Past performance is no indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice or an invitation to invest in any GAM product or strategy. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers. Specific investments described herein do not represent all investment decisions made by the manager. The reader should not assume that investment decisions identified and discussed were or will be profitable. Specific investment advice references provided herein are for illustrative purposes only and are not necessarily representative of investments that will be made in the future. No guarantee or representation is made that investment objectives will be achieved. The value of investments may go down as well as up. Investors could lose some or all of their investments.
The MSCI AC World Index is a stock index that captures large and mid-cap representation across 23 Developed Markets (DM) and 24 Emerging Markets (EM) countries. With 2,921 constituents, the index covers approximately 85% of the global investable equity opportunity set. The S&P 500 Index is a stock index tracking 500 of the largest, publicly traded companies in the United States.
References to indexes and benchmarks are hypothetical illustrations of aggregate returns and do not reflect the performance of any actual investment. Investors cannot invest in indices which do not reflect the deduction of the investment manager’s fees or other trading expenses. Such indices are provided for illustrative purposes only. Indices are unmanaged and do not incur management fees, transaction costs or other expenses associated with an investment strategy. Therefore, comparisons to indices have limitations. There can be no assurance that a portfolio will match or outperform any particular index or benchmark.
This article contains forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of GAM or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.
This disclosure shall in no way constitute a waiver or limitation of any rights a person may have under such laws and/or regulations.
In the United Kingdom, this material has been issued and approved by GAM London Ltd, 8 Finsbury Circus, London EC2M 7GB, authorised and regulated by the Financial Conduct Authority.
The information contained herein is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained herein may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information contained herein. Past performance is no indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice or an invitation to invest in any GAM product or strategy. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers. Specific investments described herein do not represent all investment decisions made by the manager. The reader should not assume that investment decisions identified and discussed were or will be profitable. Specific investment advice references provided herein are for illustrative purposes only and are not necessarily representative of investments that will be made in the future. No guarantee or representation is made that investment objectives will be achieved. The value of investments may go down as well as up. Investors could lose some or all of their investments.
The MSCI AC World Index is a stock index that captures large and mid-cap representation across 23 Developed Markets (DM) and 24 Emerging Markets (EM) countries. With 2,921 constituents, the index covers approximately 85% of the global investable equity opportunity set. The S&P 500 Index is a stock index tracking 500 of the largest, publicly traded companies in the United States.
References to indexes and benchmarks are hypothetical illustrations of aggregate returns and do not reflect the performance of any actual investment. Investors cannot invest in indices which do not reflect the deduction of the investment manager’s fees or other trading expenses. Such indices are provided for illustrative purposes only. Indices are unmanaged and do not incur management fees, transaction costs or other expenses associated with an investment strategy. Therefore, comparisons to indices have limitations. There can be no assurance that a portfolio will match or outperform any particular index or benchmark.
This article contains forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of GAM or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.
This disclosure shall in no way constitute a waiver or limitation of any rights a person may have under such laws and/or regulations.
In the United Kingdom, this material has been issued and approved by GAM London Ltd, 8 Finsbury Circus, London EC2M 7GB, authorised and regulated by the Financial Conduct Authority.