Q2 2024 Market Outlook

Reviewing our outlook one quarter ago and thinking about what has changed is always a worthwhile exercise. The first quarter of 2024 proved a continuation of the final months of 2023, with broad-based strength across the globe and broadening of strength across company size and sectors. It remains a cyclically based market in the US, especially as strong economic growth has offset the expectations being repriced for fewer rate cuts (from about six late last year to two to three today). Economic weakness, and related slowing in inflation, have been more evident in European markets, the UK and Australia. Equity market investors have perhaps even reverted to expecting less than the Fed dot plot in rate cuts and so the incoming data on inflation will be important from here. Our portfolio positioning is still reflecting our expectation for a bottoming of the recession risks around the world. So far, this has meant, year to date, we captured the positive move in markets even with our risk protection process keeping us at 'less than market’ risk settings.

1Q24 earnings results begin in the coming weeks and we expect many good results from our companies, though the question to be answered is whether share prices, most up strongly, have priced this. While, if one thinks about just the very short term, the answer is not clear to us, over the longer term, we believe the upside for the portfolio is clear.

We continue to view 10-year Treasuries as range-bound around 4% in the US and with downside prospects, alongside policy (cash) rates, in most major developed economies as inflation slows. Rate cuts later this year look virtually assured, especially in Europe, and so we still anticipate this may be supportive of equities’ returns for 2024. Elsewhere Japan has finally moved interest rates above zero and its local market has benefited from Yen weakness and better corporate governance/ shareholder friendliness. China remains intent on a 5% GDP growth goal and this seems achievable through better industrial production and exports, while its housing market is very weak and so is the consumer. The gradual shift over the past decade to more value-added production capabilities has been successful inside China, and we can see a wave of very cost-competitive industries with excess capacity – renewables, batteries, electric and other cars, automation, robotics – has emerged. There is potential for this to be disruptive in a number of global industries and add a deflationary pulse.

With disruptive innovation as the single most powerful force in capitalism, we see the major technological advancements in Artificial Intelligence and Generative AI as critically important for investors. While it remains very early in the shift, like the internet, the PC and mobile phone adoption eras, AI will, we expect, change organisations’ work and workflow, as well as our personal lives, dramatically over the next decade. Microsoft finds itself again at the forefront of these changes, as it did when we adopted PCs. For now, the enabling and expansion of Gen AI requires deep pockets and large data sets and we believe the portfolio is well exposed to this future opportunity. Strong prospects for corporate earnings and cash flows, as we seem likely to be entering a period of major new innovation and improved productivity, mean an exciting backdrop for long-term investors.

Strong earnings mitigate rate volatility risk over a longer time horizon and so the portfolio is tilted towards those companies we believe can keep delivering better-than-expected results through time and are yielding high cash flows from their operations even today. Innovation alongside execution excellence is at the heart of many of the companies we own as we believe these position them to succeed and outgrow their respective industries. The quality threshold for inclusion in the Global Strategy remains high.