Insurance Insights Q2 2024: Opportunities amidst divergence
Market narratives and investment themes appear to vacillate every few months because of diverging trends in global growth, inflation, and monetary policy. In our Invesco 2024 mid-year outlook, we focus on opportunities that have been created amidst this divergence.
Global growth is improving but not evenly. Above trend growth in the US is starting to drop back to more normalized levels. The Eurozone is reaccelerating, having bottomed out after experiencing a technical recession last year. Idiosyncratic forces are taking hold across the Asian region and export-oriented countries exposed to the global trade cycle have done better.
Yet, global central banks are largely headed in the same destination because overall disinflationary progress remains encouraging. US disinflation continues but appears somewhat prolonged which is why we expect the Fed to wait until at least September to cut rates. Moreover, the recent elections in Mexico, India and South Africa are a good reminder that political risk can lead to market volatility.
Source: Fed, ECB, Riksbanken, SNB. Data as at 10 June 2024.
The mixed economic data coupled with surprising election outcomes could have important implications for financial markets in the months and years ahead, which is why we believe investors should consider a balanced portfolio.
While we expect investors to be more risk tolerant in the second half of the year as fundamentals improve and rate cuts are in the offing, we think US equity valuations are stretched and more opportunities lie in European, Japanese, and emerging market equities.
On the fixed income side, yields and rates remain high though credit spreads are tight – which is why we like high quality non-investment grade debt. Bank loan yields are sitting at their highest levels in decades and offer wider spreads than other areas of fixed income.
Alternative investments, previously overlooked, now appear more attractive in a macro environment characterized by higher interest rates and diverging macroeconomic narratives – with portfolio diversification as an added benefit. The macro backdrop is now more supportive of private credit transactions and there continues to be pockets of opportunity within private equity. Private real estate continues to see robust income fundamentals though could lag the broader capital markets recovery.
While our investment outlook for the second half of 2024 has become more optimistic, risks remain, and we are closely watching geopolitical tensions, US elections and financial fragilities.
