Against a backdrop of conflicts and numerous elections around the world, growth concerns are looming and investors will remain glued to central banks which are set to cut policy rates further this year. To help you to navigate this complex landscape, we focus on four mid-year investment themes, driven by dominant trends offering attractive opportunities.
Despite obvious geopolitical tensions around the world, global equity returns rallied in the year to the end of May, propelled by US, eurozone and Japanese stocks on the back of abundant global liquidity and surprisingly strong earnings trends. Gold has continued to perform its traditional safe-haven role and remains an effective diversifying asset.
Inflation is coming down and central banks will lower their policy rates, with the European Central Bank already leading the way. After a period of rampant inflation in the wake of COVID-related supply chain disruptions and the energy price surge triggered by the conflict in Ukraine, inflation finally looks to be on the wane. We expect further (albeit irregular) progress in the inflation rate approaching the 2% target. In early June, the ECB got the ball rolling by cutting its policy rate by 25 basis points, and the Federal Reserve is expected to follow suit before year-end. Key to this continued progress will be a cooling in employment markets, thus reducing wage pressure on service sector prices.
Unprecedented 7 Magnificent dominance. The stellar returns in global equity markets since late 2022 have been largely driven by a small group of technology mega-caps, dubbed the 7 Magnificent (including Nvidia, Microsoft and Amazon). This elevated stock market concentration, last seen in 1968-73 and 1999-2000, is rare in historical terms.
These Mag 7 stocks have posted impressive earnings growth over the past few quarters but have also benefited from a substantial valuation attracting huge inflows. Today, they make up for 31% of the S&P 500 and 19% of the MSCI All Country World index. This concentration represents the opposite of the diversification that investors typically seek.
Commodities bite back with a vengeance. The change in macroeconomic and geopolitical environments since 2022 has triggered a huge shift in the attractiveness of exposure to the commodity asset class, in our view. Thanks in part to a long period of under-investment in new production, the world is confronted with growing imbalances between constrained supply and increasing demand for a broad range of raw materials. These include copper, cocoa, silver, tin and even uranium. However, crude oil and oil products far outweigh all other commodity markets combined. Even here, we see the prospect of a tightening of the global supply-demand balance, as US onshore oil production plateaus after a long period of robust production growth. OPEC members may finally re-establish their traditional role as the swing producer of crude oil to the world.
Anti-obesity medications boost longevity potential. The explosive arrival of GLP-1 inhibitor treatments for type 2 diabetes and obesity from Novo Nordisk and Eli Lilly have given new hope that we can improve the healthy lifespans of a huge swathe of the world’s population, given that 890 million people were obese in 2022 and 2.5 billion people overweight.
