Markets may be too optimistic amid multiple risks, says Natixis IM

With the second half of 2024 well underway, most strategists and investors are feeling relatively confident compared to the start of the year, but there are still significant risks ahead.  

Given the uncertainty about the disruptive impact that geopolitics, technology, and economics could deliver to investors’ portfolios during the second half of the year, a survey of strategists, portfolio managers, research analysts and economists across Natixis Investment Managers and its affiliates found that 67% believe markets may be over optimistic.    

The United States is the epicenter of the uncertainty, with three quarters of respondents citing a medium or high risk from the presidential election with 77% saying that elections matter to markets and 60% believing the presidential election is more likely to weigh on the market than support it.

Inflation remains a key concern with only 7% of respondents believing that the Fed will reach its target by the end of the year while 77% believe rates will be higher for longer. Four in ten worry that surprise inflation could halt the market rally.

While fears of a US recession have eased since the year began and 73% of the strategists surveyed believe there is no (10%) or a low (63%) risk of a global recession, uncertainty remains.

International geopolitics is also still high on the agenda, along with government debt with 53% saying that debt levels are sustainable now but could be a threat to the economy longer term and 37% saying government debt is already at an unsustainable level.

While the US could be a great risk for markets, it is also viewed as the biggest opportunity with 67% of survey respondents projecting that the US stock market will offer investors the best return potential in the second half of 2024 with information technology continuing to be the driver.

For fixed income, respondents say credit quality, core short government bonds, core long government bonds, and investment grade corporates to deliver the best returns in the US during this half of the year. Fewer see the risk-reward trade off working in favour of bonds with more exposure to credit risk, as only 13% think high yield bonds or hard currency emerging market debt will offer the best returns.

For those investors sitting on cash stockpiles, Natixis IM’s experts say there are better returns to be had from investing in equities, given the returns seen in the first six months of 2024: 15.3% for S&P 500, 18.6% for the NASDAQ, 13.3% for the FTSE All-World Index, and 18.28% for the Nikkei.

“We have seen a strong start to the year with robust stock market performances, easing inflation and a resurgence of the bond market,” said Mabrouk Chetouane, Head of Global Market Strategy, Natixis IM. “Tech growth has continued to bolster US stock markets, with the S&P and NASDAQ seeing returns of 15.3% and 18.6% respectively, with the strategists having no doubt that US markets will continue to lead the way in the second half of the year. However, investors should be cautiously optimistic as they continue to face an array of headwinds in the second half of the year, led by politics, geopolitical tensions, potentially higher for longer rates, slower consumer spending, and elevated levels of government debt.”

60-20-20 PORTFOLIOS

With some much uncertainty and risk, the survey highlights the importance of diversification of portfolios across bonds, equities, and alternative investments to prevent over exposure to a single asset class.

Six in ten (60%) strategists surveyed think a portfolio made up of 60% equities, 20% fixed income and 20% alternatives will outperform the traditional 60/40 portfolio in the second half of the year.

Among the potential winners for investors are precious metals and absolute return strategies and perhaps private credit.

Meanwhile, the report states that sustainable investing will continue to be divisive but, outside of political divides, is expected to be driven by consumer demand. However, consensus may not be achieved globally on regulatory requirements, definitions, and reporting frameworks.

That said, respondents believe that asset managers will need a net-zero commitment to win business as impact investing continues to expand.

AI IMPACT

Asked about the impact of AI over the next two to five years, 73% of respondents said it will alter traditional market patterns and 77% believe it will accelerate day trading. 

While most said it is not yet realising its full potential, and also that it comes with risks including increased potential for fraud and scams, 80% think AI will help uncover new opportunities in their own business that are otherwise undetectable, and 70% think it will help detect unknown risks.