Private bank and asset manager Lombard Odier, headquartered in Geneva, has just published its latest CIO office viewpoint which outlines the bank’s 10 Investment Convictions for the second half of 2024.

Against a moderately healthy macroeconomic backdrop, with equities hovering around record highs, in contrast to rising political risks, Lombard Odier looks at how investors should navigate the second half of 2024.

The investment manager believes that the investment environment will be driven by the disinflation trend and the path of interest rates will focus on political risks, notably the US elections and geopolitical competition. The prospect of such changes should translate into episodes of market volatility.

Against this background, Lombard Odier outlines its 10 investment convictions for the rest of the year.

1. Keep portfolio risk tactically neutral, adjust exposures as opportunities arise
The firm’s macroeconomic scenario is constructive for financial markets but given geopolitical risks in the second half of 2024, it wants to be risk conscious and position for a range of economic and market scenarios. Therefore it is keeping portfolio diversification at the core of its strategy. Bouts of risk aversion may trigger temporary drops in high equity-bond correlations, which argues for a balanced exposure to high quality bonds. However, such instances may open up opportunities in other risk assets and the firm stands ready to invest in those as they arise.

2. Capital gains in fixed income should improve modestly
Fixed income, which can provide an income stream for conservative investors, is a useful instrument to lock in high yields for buy-and-hold investors. Nevertheless, interest rate cuts have started and should extend as inflation falls in the second half of 2024. The firm expects modest bond prices gains (adding some returns on top of coupons), as yields fall. The European Central Bank and the Bank of England are likely to cut rates before and to a larger extent than the Federal Reserve. The firm prefers German Bunds and UK gilts over US Treasuries (hedged against the portfolio reference currency). Lombard Odier prefers bonds with five- to seven-year maturities, as these stand to gain from the start of policy easing, but suggests a flexible approach to managing the duration of bond exposures, especially in the US, given uncertainty over politics, fiscal policies and inflation.

3. Seek opportunities for carry with selected bond exposures
Political risk and the start of the US presidential election campaign could keep volatility elevated. With spreads already tight, returns from corporate credit could be limited in the near term. Throughout the second half of 2024, however, opportunities could arise to capture carry (a pickup in yields). Within investment grade (IG) bonds, the firm likes euro over US dollar denominated bonds on a dollar hedged basis, which helps extract additional carry. It believes that select crossover (BBB/BB rated) credit offers a good risk-reward in an environment of improving growth and disinflation. Lombard Odier also prefers emerging market (EM) hard currency corporate bonds over EM sovereign debt, as EM credit offers better diversification and a higher rating quality. The yield premium over EM sovereign bonds (excluding those rated-CCC) also remains attractive.

4. Favor cyclical stocks
Equities look set to offer more upside than bonds over the course of the year, but concentration in the US market and geopolitical risks have increased and could trigger near-term volatility. Lombard Odier sees equities being supported by high single-digit earnings' growth and rate cuts in 2024, and stands ready to take advantage of opportunities in selected cyclical sectors, notably energy, materials, consumer discretionary and communication services. The firm believes that its sector preferences could evolve in line with US election outcomes.

5. Lagging regions and sectors to catch up
In the first half of the year, Lombard Odier built exposures to fairly priced markets that had lagged a generally strong equity performance to date. The UK stock market was a first step in this direction. It offers reasonable valuations, decent earnings' growth, a sound macroeconomic outlook (interest rates heading lower, weak sterling) and potential inflows as a result of domestic pension reforms. The firm believes that selected EM equity markets could also offer fairly priced growth exposure, highlighting Taiwan, South Korea and India. Lombard Odier’s least preferred region remains the eurozone, which recently suffered from the political uncertainty triggered by EU elections, and should continue to trail world indices on weaker earnings prospects.

6. Thematic equity exposures can help increase portfolio resilience
For investors keen to build more portfolio resilience and capture longer-term growth drivers, Lombard Odier believes that its thematic equity framework offers new opportunities. This builds on its analysis of transformations underway in economies and societies – from changes in longevity, demographics, infrastructure, and the sustainability transition – and seeks to capitalize on the listed equity opportunities that flow from them. Investors willing and able to withstand some short-term volatility in this portion of their portfolios can build exposure to the firm’s preferred thematic stocks.

7. Continued dollar strength
The dollar benefits from a yield advantage over other G10 currencies and from relatively weaker growth outside the US. This is likely to remain the case in 2024. However, US political and related fiscal risks, the dollar’s overvaluation, the progressive rise of gold at the expense of the dollar among central bank reserve allocations and a multi-polar world cast some doubts over the longer-term sustainability of dollar strength. Nevertheless, it thinks that the dollar will continue to appreciate versus the euro and sterling in 2024, as solid US growth, a faster European rate-cutting cycle and cost of carry will continue to provide an edge to the dollar, which also helps to diversify portfolios. Lombard Odier sees the euro losing ground against the Swiss franc even if a near-term consolidation is likely, as interest rate differentials narrow and geopolitical risks justify demand for other safe-haven assets.

8. Commodity prices could see solid gains ahead
Amid geopolitical uncertainty, safe and reliable access to natural resources is imperative, especially as the draw on these resources will be heavier in the transition to a net-zero economy. The firm sees lasting shifts in commodity markets. Industrial metals, especially copper, face new structural demand from electrification and the expansion of data centres required by the rise of artificial intelligence. Alternative building and packaging materials such as timber should also see growing demand as the rise of carbon prices and the expansion of carbon trading markets increasingly allow natural resources to be fairly valued. The complex geopolitical and financial environment makes gold more important for central banks as a reserve asset. Lombard Odier expects gold prices to remain supported, despite a resilient dollar – as the two often move in inverse directions. Bouts of risk aversion could hamper commodity prices, but it would use price weakness to (re)build exposures to industrial metals.

9. Alternative strategies can offer income and diversification
For Swiss franc investors, Lombard Odier thinks the low level of bond yields can continue to support listed Swiss real estate funds, which currently offer an attractive yield pick-up over Swiss sovereign bonds. In hedge funds, the firm’s conviction in global macro and trend-following strategies remains strong, but it also seeks to capitalize on a broader array of opportunities. These include strategies that are designed to take advantage of heightened corporate activity, including mergers, acquisitions and restructuring (event-driven strategies) and long-short equity strategies, as the environment for stock picking improves in a normalizing macroeconomic environment and a return of volatility.

10. Private assets can strengthen portfolios for eligible investors
For investors with a long-term investment horizon and the ability to hold investments that may not be easy to buy and sell, Lombard Odier believes that private assets can play a valuable role in diversified multi-asset portfolios. The inclusion of the asset class can enhance portfolio returns, lower volatility and improve diversification, as well as provide access to innovative and fast-growing companies that are increasingly staying in private hands rather than seeking to list on public markets.