H2 outlook summary with Monica Defend, Amundi Investment Institute

Amundi H2 Outlook

In this cycle, restrictive monetary policies and fading fiscal expansion are curbing inflation and growth, without triggering a recession in the main economic areas. Now it is time for Central Banks to start a new cycle of cuts to avoid an excessive slowdown. For the second half of the year, we have identified seven key convictions that will share our investment strategy. 

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Monica Defend

Monica Defend

Head of Amundi Investment Institute

In a world with decelerating but sticky inflation and multi-speed growth, Central Banks will need to carefully assess their stance and communication. Their actions may not be synchronised, but we expect any divergences to be limited.

Monica Defend, Head of Amundi Investment Institute

Key Convictions for H2 2024

1. Multi-speed growth with sticky inflation and diverging dynamics

Global growth is expected to reach 3.1% in 2024. However, there are divergences: the US is slowing down without entering a recession, the Eurozone is on a recovery path, India's strong growth continues while China is on a controlled slowdown trajectory. Inflation has been stickier than expected, but it is expected to decelerate further towards Central Bank targets in 2025. This will allow Central Banks to initiate and continue the new cycle of cuts at different speeds.

Amundi Investment Institute Projections at 3 July 2024

(Real GDP growth, annual percent change) 

Multi-speed growth

2. Geopolitical risk is high and rising

Geopolitical risk is expected to increase in the coming years, with factors such as protectionism, sanctions, tariffs, export controls and trade wars intensifying. Some regions, notably Europe, may be less able to afford the costs. The outcome of the US election will be pivotal, as US foreign policy in particular is expected to differ significantly under a Biden or a Trump presidency, although confrontation with China is expected to rise in any case.

Main and alternative scenarios of Geopolitics

MAIN SCENARIO - Resilient multi-speed growth

  • Ukraine/Russia: ongoing fighting (no ceasefire in sight).
  • Israel: Higher risk of escalation. But military conflict to stay local.
  • China/US: a controlled downward trajectory.
  • More protectionism, friend-shoring

DOWNSIDE SCENARIO - Renewed stagflationary pressure

  • Worsening Ukraine war.
  • Widening conflict in the Middle East.
  • More protectionism and increased retaliation to protectionist measures.

UPSIDE SCENARIO - More disinflation with productivity gains

  • De-escalation / ceasefire in Ukraine.
  • Permanent ceasefire between Israel and Hamas
  • Lower energy / food prices.

Geopolitical risk implications on commodities

Crude oil is a key stress marker in the Middle East. Base metals are tied to the energy transition and implicitly to the US-China tech war, amid mining tightness and supply concentration. Metals are a crucial stake in Africa too, where the West is competing with China for influence. Natural gas and wheat are being weaponised in the Ukraine war, while access to Russian resources is being dramatically reshaped. Beyond its safe-haven status, gold is increasingly used as a means to diversify away from dollar transactions.

Commodity prices suggest geopolitical risk is set to structurally intensify, but we see more risk coming from Asia than from the Middle East.

3. Equity: time for a breather and broadening

Equities are still attractive unless we enter a recession, which is not our base case. However, there are concerns about excessive valuations in US mega caps. Opportunities abound in US quality, value and international equity. In Europe, consider small-cap stocks to capitalise on the economic recovery, attractive valuations and the ECB cutting rates.

equities
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Vincent Mortier

Vincent Mortier

Group CIO

The economic context supports earnings and risky assets, but much of the upside potential is already priced in and finding clear catalysts for further gains is challenging.

Vincent Mortier, Group CIO

4. Seize opportunities in bonds and prepare for structural steepening

After trading in a narrow range, yields are set for a new course with rate cuts approaching and curves expected to structurally steepen. With yields already at historically appealing levels, a window of opportunity is opening. We favour government bonds and investment grade credit which maintain the best risk/reward profile. EM bonds also offer an attractive risk-return profile and will benefit from the Fed cuts in the second semester.

The Investment sequence

5. Emerging Markets will benefit from Fed easing and domestic resilience

Resilient growth, supply chain rebalancing and Fed rate cuts mean Emerging Market equities offer interesting opportunities. They are also supported by attractive valuations compared to the US. We favour Latam and Asia, with India in focus thanks to its robust growth and transformative trajectory. Bonds also will be lifted by Fed cuts, with local currencies set to become attractive.

EM graph

Source: Amundi Investment Institute on Bloomberg data.
Data as of 3 July 2024.

Source: Amundi Investment Institute on Bloomberg data. Data as of 3 July 2024. Sovereign LC = J.P. Morgan GBI-EM Global Diversified Composite LOC, Sovereign HC = J.P. Morgan EMBI Global Diversified Composite, Corporate = J.P. Morgan Corporate EMBI Broad Diversified Composite Index.

 

India benefits from supply chain relocation and internal policies and its capex cycle

Indonesia benefits from structural tailwinds such as exposure to critical minerals and favourable demographics

South Korea favoured by improving corporate governance

Brazil benefits from being first to cut rates, attractive valuations and growth supported by agriculture

Regarding China, recent supportive policies are encouraging, but we remain neutral overall

EM hard currency debt: we are positive amid a supportive macro backdrop. Valuations and carry are attractive in HY vs IG and thus we maintain our preference for the former

EM local currency debt: we are selective and exploring
high-yielding countries such as those in Latin America

EM corporate:  we are positive, favouring HY over IG given the former’s attractive valuations

6. Enhance the asset allocation with commodities and real and alternative assets

It's time to strike a balance between opportunities from supportive earnings dynamics and appealing bond yields with risks from high uncertainty about growth and inflation. This means combining a positive equity stance with a long-duration bias and searching for additional sources of diversification, such as commodities, and real and alternative assets, including hedge funds. These assets will be key to enhancing portfolios’ risk-return profile.

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Matteo Germano

Matteo Germano

Deputy Group CIO

To navigate the uncertain transition into the next phase of the cycle, we favour high-quality equities, a positive duration stance and commodities to hedge against inflation risk.

Matteo Germano, Deputy Group CIO

7. Look for companies that will help ramp up the energy transition

To achieve a low-carbon energy system, the world must triple renewable capacity by 2030. This means investing heavily in critical minerals and expanding electricity grids. Investors should focus on companies that can drive the energy transition in both Developed and Emerging Market. 

 

energy transition

To get a full picture

 

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