Navigating geopolitics and waiting on Fed cuts 

MONDAY, JUNE 24, 2024

Stefan Hofer, Chief Investment Strategist at LGT, shares LGT's 2024 H2 economic outlook and investment strategy.

The United States

The US economy and equities have outperformed our expectations to date this year.  Household consumption remains high, supported by a very low unemployment rate of 4%. Inflation is falling, albeit at a slower rate than we forecast in January 2024. On balance, we think the US Federal Reserve will cut interest rates starting in September 2024. Given the proximity to the presidential elections, we may only see one rate cut in 2024.  Corporate earnings growth in the US is likewise very robust and hence this market remains our most preferred heading into the second half of the year.  We do not think there is a material risk of the US dollar losing its prime position as the world’s reserve currency, even with rising government debt levels. 


In yen terms, Japanese risk assets have performed well so far in 2024.  At the same time however, the yen has moved against our forecast and weakened vis-à-vis the US dollar in recent months.  At one point, the USD/JPY spiked to 160 before intervention by the Bank of Japan / Ministry of Finance pulled it to 155.  If the Federal Reserve cuts rates this coming September and continues to do so over 2025, then the yield gap between the two currencies would fade, allowing the yen to strengthen.  In other regards, we think the Bank of Japan will incrementally tighten monetary policy, but the room to radically hike interest rates is arguably missing. 


We remain structurally positive on Indian equities but accept that the execution risk of key government policies is now higher given the outcome of the recent election.  Within the context of building a broader coalition, India could see fiscal policy loosened under Prime Minister Modi’s third term.  Furthermore, the priority of attracting Foreign Direct Investment may be lower, as will the emphasis on important land reforms.  That said, if investors see clear evidence over the coming months that the commitment to building much-needed infrastructure is still strong, then we would expect Indian equities to outperform over the medium term.  


The outlook for Chinese assets has improved marginally since the recent announcement that state-owned entities would be buying up empty/excess real estate.  The most recent data shows that new house prices across China are still falling – so the move to remove excess supply may help to stabilise the market and boost consumer confidence. Separately, we see the current election cycle in the US as a source of political noise, especially on the US-China trade front, where further tariff and non-tariff measures are likely.  As such, we take a cautious stance on China, preferring to wait for calmer geopolitical waters ahead.


Europe is showing “green shoots” of recovery:  borrowing by households has turned positive across the Eurozone, after a long period of shrinking loans due to higher costs (interest rates).  Inflation is falling faster in the Eurozone than in the US, allowing the European Central Bank to move ahead of the Federal Reserve on rate cuts.  That said, natural gas costs for the industry have jumped significantly, leading to isolated job losses.  In aggregate, we have a Neutral rating on Europe but would look to upgrade this stance to Overweight, especially if the earnings season for 2Q24 shows accelerating profitability.


Thai equities continue to underperform regional peers for the second straight year amid a sluggish economy and some political noise.  However, we expect a gradual economic improvement this year and next, driven by tourism recovery (currently at 87% of pre-Covid levels) and an acceleration in fiscal stimulus to households.  With regards to tourism, the authorities in Thailand are shifting to focus on high-spending tourists, by promoting globally competitive attractions/events.

Global Investment Strategy

In a Balanced investment strategy, our in-house Portfolio Management remains fully invested.  We are Overweight on equities (42% vs. a baseline setting of 35%).  North America and Japan are our focus equity markets. Overall Fixed Income allocations are closer to the benchmark (42%), with a heavy tilt towards Investment Grade bonds. Alternative Investments, alongside cash (1%) round out the Balanced portfolio at 15%. 

Stefan Hofer, Chief Investment Strategist at LGT