Post-inflation rally and ‘soft-landing’ for markets despite continued political uncertainty

Mediolanum International Funds (MIFL) anticipates a ‘soft landing’ with stocks set to rally following as global markets are set to benefit from a lower inflationary environment in the second half of the year, however, the "higher-for-longer" interest rate environment thus far has significant implications for both equity and bond markets, affecting growth companies and bond yield.

In its Mid-Year Global Market Outlook MIFL highlights that, despite the rate raising cycle of 2023, economies have shown resilience, leading to an equity rally and moderate volatility in bond markets.

However, a mixture of conflict, the US late-cycle economy, high valuations and political uncertainty ahead, especially around the US elections, mean that investors should consider a balanced approach.

Key findings

● Bond markets
○ Bonds with longer maturities have suffered so far this year, as this longer time-to-maturity makes bonds more sensitive to yield movements, which means longer-dated bonds may be preferred. Short-term bonds currently offer attractive yields and liquidity as they tend to have less than one year maturity
○ Emerging markets are already cutting interest rates and improved governance and transparency in some EMs makes this asset class compelling

● Equity markets
○ The global economy is forecasted to maintain a growth rate of 2.6% this year, with emerging markets, particularly India and China, leading the way. This improved growth is positive news for equity investors, as ultimately equity returns are highly correlated to economic growth over the long term.
○ Growth companies in the tech sector lead the equity rally, navigating the higher interest rate environment. However there are doubts that this will continue and is a reason to diversify exposure to reduce risk.
○ While more volatility is expected for equities in H2, if central banks can engineer a ‘‘soft landing’ then it will set investors up for better opportunities.
○ An “ailing” Europe is earlier in the economic cycle than the US, which has enjoyed strong growth over the past year but may be beginning to show signs of tiredness, with the difference in their respective growth rates likely to narrow.

● Sustainability - sustainable real estate, the production of electric vehicles and green bond markets offer opportunities for investors.

Brian O’Reilly at Mediolanum International Funds Ltd said: "With interest rates likely to stay higher for longer and emerging markets like India and China driving global growth, investors face both opportunities and challenges.

"As we approach the U.S. election in November, we anticipate heightened uncertainty and increased market volatility, driven by a mix of geopolitical conflict, the late-cycle U.S. economy, and high valuations. While economic growth and corporate profitability are in relatively good health, investors should focus on building portfolios around a strong core, adding risk selectively based on personal goals and circumstances.

"We see opportunities in longer-term bonds, a diversified approach to equities, and sustainable investment, yet the unpredictable political landscape requires careful navigation. We believe that informed, diversified strategies, coupled with active management, will enable investors to effectively separate the wheat from the chaff and thrive in this dynamic environment."