Global asset manager abrdn has just published its latest quarterly report on the macroeconomic and investment outlook for the fourth quarter of 2024.

Edinburgh headquartered abrdn remains positive about equities and bonds in the fourth quarter of this year, given monetary easing and an expected global economic soft landing, but it has become tactically overweight in the dollar to hedge against the US election outcome and geopolitical risk.

Spiking tensions in the Middle East are a risk to the outlook, but oil prices would have to rise by a lot to prevent central banks cutting interest rates further, the firm said in a statement.

Meanwhile, as the US presidential election looks set to hang on a very small margin, with a 50 per cent chance of a Trump victory, abrdn sees potential for trade and fiscal policies that could be inflationary.

However, it is recession, rather than inflation, which abrdn sees as the bigger risk for markets over the medium term, irrespective of whoever ends up in the White House.  

The asset manager sees fundamental support to corporate earnings, and a benefit in holding duration. But as the prevailing macro environment moves from one characterized by negative supply shocks to potential negative growth shocks, bonds and equities ought to move from being positively correlated to negatively correlated, providing diversification, the firm continued. This has been the case in recent months, with duration performing during equity market corrections.

“Geopolitical uncertainty will shape this quarter and beyond with several major risks to our main scenario. One is further conflict escalation in the Middle East that sends oil prices and geopolitical risk premia substantially higher. Another is a risk of US-led recession,” Peter Branner, chief investments officer, abrdn, said. However, looking through the risks, he forecasts cooling yet still positive US growth, inflation around central bank targets, a global rate cutting cycle, and a tentative view that Chinese stimulus is step-shifting higher.

“In terms of opportunities, whilst both equities and bonds have done well so far this year, we see ongoing fundamental support to corporate earnings, and benefit in holding duration given the risks. There are bright spots in real estate, and we’re tactically overweight in the US dollar as we see the US election as 50:50,” Branner added. 

Equities
A proactive approach to monetary easing and the materialization of a soft landing should support corporate risk. The recent earnings' season saw positive revisions, and a broadening out of earnings growth to cyclical sectors should support prices. While US equity valuations are elevated, abrdn thinks that tech stocks’ high margins, high free cash flow generation, and strong balance sheets set them apart from past bubbles.

The asset manager has also shifted to signal a modestly positive view on emerging market equities. There has been a change in the extent of Chinese policy easing which could lead to a significantly higher repricing of Chinese equities. However, sustained support will be required to offset structural headwinds from real estate.

Bonds
abrdn remains positive on duration, signaled via an overweight to global government bonds and to emerging markets local currency bonds. However, reflecting the extent of the rally in duration markets and emerging markets currencies, and risks from a Trump presidency, the emerging markets local bond conviction was lowered.

With interest rates having moved over the last quarter it could be that duration is a tactical neutral at this point. But with recession risks elevated over the 12 to 18-month horizon, it is sensible to hold some duration.

Real Estate
abrdn has upgraded its view on direct global real estate to positive and finds listed real estate, geographies such as the UK and Europe, and sectors such as residential, hotels, student accommodation, data centres, and logistics most attractive.

There has been a deep valuation correction across global real estate markets, especially in the UK and Europe, and in the office sector. However, this process now looks largely complete. The yield premium on real estate, especially as policy rates are being cut, is attracting capital back into the sector. And constrained supply is supporting rental value growth as occupiers consolidate into future-fit properties.

Hedging Trump
abrdn recognizes that the US election is a key risk to the global economy and has analyzed various US election scenarios to try to understand how different election results could impact asset prices and portfolios.

As a result, the firm has become tactically overweight in the dollar in the run-up to the US election. In the soft-landing base case for the economy, abrdn expects the dollar to modestly depreciate over the medium term. But in the event of a Trump victory, the dollar would likely appreciate and hedge losses on other positions.

Macro
The asset manager expects a global economic soft landing and has become less concerned with the risks of an inflation overshoot generated by low unemployment and strong wage growth.

There are certainly still several sources of upside global inflation risk, including a sharp rise in oil prices and disruptions to global supply chains related to spiking tensions in the Middle East. 

But despite the soft-landing baseline, the firm notes that the US economy is slowing, with interest rate-sensitive sectors such as manufacturing and housing struggling, and the fiscal impulse fading. It is possible that this slowdown will morph into a more damaging contraction.

This economic backdrop explains why abrdn is expecting a sustained global interest rate cutting cycle and continues to judge that global equilibrium interest rates remain relatively low, around 2 to 3 per cent in nominal terms. While there is significant uncertainty around this judgement, many of the structural factors that pinned equilibrium rates down before the onset of the pandemic are still broadly in place. The recent sharp slowing in nominal growth also suggests that the policy has been tight. As such, the global rate-cutting cycle has significant room to run before interest rates return to a more neutral setting, let alone a stimulative stance.