What is the macroeconomic outlook for the rest of this year?

Inflation should be manageable, with central banks likely to cut rates at different times

Merchandise on the floor of the New York Stock Exchange. The US presidential election in November is a key driver for financial markets. Bloomberg

Divergences in the economic fortunes of different regions across the globe have surfaced this year.

The US economy is thriving due to strong consumer spending, fiscal stimulus and a robust labour market.

In contrast, Europe and Asia, particularly China, are struggling, with the country's real estate market downturn affecting its major trading partners.

However, signs of recovery are visible. China's government is starting to support the housing market and previous industrial policy measures are expected to boost global trade, benefiting European and Asian industrial suppliers.

Low global inventories suggest a restocking cycle, potentially reviving industrial production in late 2024.

Inflation trends are also varied. The US is facing a bumpy disinflation process, Europe is seeing a smoother inflation decline and China is experiencing deflationary pressures.

These divergences present different challenges for central banks, with expected rate cuts in the US and Europe but continued easing in China.

Overall, inflation should be manageable, with central banks likely starting to cut rates at different times.

US elections: Sweep or no sweep?

The US presidential election in November is a key driver for financial markets.

A Republican sweep could lead to increased government spending, impacting bond yields and the US dollar.

The outcome will significantly influence economic policy, with market volatility expected until the results are known.

Meanwhile, the US Federal Reserve is likely to maintain stability, providing a supportive environment for risk assets.

Currencies and fixed income

Traditionally, the US dollar, the Swiss franc (CHF) and the Japanese yen (JPY) are seen as safe-haven currencies.

However, the JPY's status is changing due to policy shifts by the Bank of Japan.

Currently, the USD benefits from a strong domestic economy, but election uncertainties could affect it.

The CHF is expected to remain stable unless a shock occurs.

Cyclical currencies, like the Australian dollar (AUD) and the Swedish krona (SEK), may become attractive later in 2024 as the USD's strength wanes and the global economic cycle strengthens.

Meanwhile, looking at fixed income, investor perceptions of sovereign bonds have shifted from a hunt for yield to concerns about oversupply due to increased government spending.

This change, coupled with central banks no longer being the buyers of last resort, suggests higher interest rates.

The 10-year US Treasury yield is expected to hover around 4.5 per cent, with significant swings. Investors should focus on quality corporate bonds and emerging market hard-currency bonds, particularly in Asia, Latin America and the Middle East.

Equities: Opportunities to be found

Developed market equities have performed well in early 2024, driven by improved economic growth prospects.

Large-cap quality growth stocks, particularly in the US, remain favoured.

As the global economy improves, cyclical stocks, especially in the industrial sector, present buying opportunities. Japanese equities also offer potential due to corporate reforms.

Mid-cap stocks in cyclical sectors like industrials and financials could benefit from the expected economic upturn, but a selective approach focusing on quality is crucial.

Emerging market equities have lagged developed markets but have shown improvement since late April.

China's market has seen significant gains and its gradual recovery is expected to continue. Emerging market central banks are closely tied to Fed policy, with potential rate cuts impacting earnings growth.

We maintain a neutral allocation for emerging markets, with a preference for India, South Korea, Taiwan and Brazil.

China is upgraded to a tactical overweight due to positive policy changes and momentum in its stock market.

Equity markets remain in an uptrend, supported by broadening market breadth and investor sentiment.

Commodities: Oil and gold in focus

The commodity market rebounded in early 2024, driven by gold, oil and industrial metals.

Gold's rally is supported by increased willingness to pay, particularly in Asia, and central bank purchases.

Oil prices are expected to trend lower as geopolitical risk premiums fade.

Overall, commodity markets are moving away from super shocks, with structural scarcities less pronounced.

Looking ahead

Cyclical factors have influenced the performance of next generation investment themes.

Automation, robotics and future cities are set to benefit from an improving cyclical backdrop.

Automation demand is driven by an ageing workforce, supply chain security and the transition to electric vehicles.

Future cities focus on energy-efficient buildings, with investments in building technology and efficiency becoming essential. The cyclical improvement in real estate markets supports this theme, highlighting the importance of renovation and efficiency upgrades.

Overall, the global economy in 2024 is marked by regional divergences, with the US thriving and Europe and Asia, especially China, facing challenges.

However, China's policy measures are expected to revive global trade, benefiting industrial suppliers.

Christian Gattiker is head of research at Julius Baer