Weekly market commentary

Over half the world's population goes to the polls in 2024. We watch for investment implications. We think governments and candidates have limited solutions to key financial issues for voters. We stay overweight US stocks before the US election yet cautious on long-term US Treasuries. No matter who wins, budget deficits are set to stay large. Elections in India and Mexico sparked market volatility, but we focus on long-term positives. A July UK election supports our UK gilts preference.

Persistently large

Average US fiscal deficit as a share of GDP, 1960-2034

Global voters are expressing frustration about many issues but notably the rising cost of living. Yet we see many incumbent leaders or challengers constrained in any response, notably due to high public debt somewhat tying their hands. In November, US President Joe Biden will face former President Donald Trump. Under both, pandemic borrowing swelled fiscal deficits – the shortfall in government revenue versus spending. No matter who wins, deficits are set to remain historically large. Neither is charting a path to a sustained reduction in deficits. See the chart. These deficits reinforce persistent inflation and our view that the Federal Reserve will need to keep rates high for longer. We think that, and markets needing to absorb large bond issuance, will spur investors to demand more term premium, or compensation for the risk of holding long-term US bonds.

We track potential changes on US trade, immigration and energy policy – and see a potential inflation boost no matter who wins. On trade, Trump has suggested a more protectionist stance that would levy a 10% across-the-board tariff and a 60% tariff on Chinese goods. Biden is expected to keep his current protectionist policies, like higher tariffs for some sectors, industrial policies favoring domestic production and the use of export controls. Major changes to legal immigration during a second Trump or Biden administration would have implications for inflation as the US faces a shrinking working-age population. On energy policy, the Inflation Reduction Act (IRA) and its low-carbon transition investment incentives are in focus. If Republicans control Congress, they may revise or repeal parts of the IRA to fund tax cuts.

Elections around the globe

It’s already been a busy election year. In India, Prime Minister Narendra Modi secured a third term to lead the government but will need coalition support after failing to win a majority last week. That could slow some reforms – but it doesn’t change the long-term benefits from the confluence of mega forces, like a young population and digitalising economy. Mexico’s election saw the ruling coalition score a resounding win that points to continuity. We see both India and Mexico benefiting from a rewiring of global supply chains. Though in Mexico, a new president and government rolling out broad reforms could weaken institutional checks and balances. Even as right-wing and populist parties performed well in the European Union elections, centrist parties are expected to keep overall control of the European Parliament. Yet the performance of governing parties will have repercussions, such as President Emmanuel Macron calling a snap election in France after his party suffered a big loss.

The UK votes in early July rather than in late 2024 as originally expected. A decisive victory for one party could create the political breathing space to address the UK’s structural issues, such as weak productivity growth. Beyond potential policy changes, a July election could allow the Bank of England to start cutting rates once it’s over – a reason why we like UK bonds.

Our bottom line

We stay overweight US stocks for now and eye the key policy areas of the presidential election. On a strategic horizon of five years and longer, we like government bonds in the euro area and UK on expectations for lower interest rates.

Market backdrop

US stocks notched fresh highs last week and are up nearly 13% this year. The Bank of Canada and the European Central Bank both cut rates for the first time since the start of pandemic. Markets are focused on how far central banks can cut rates – and are now split on whether the Fed will cut once or twice this year after the strong US payroll gains last week. We don’t see these rate cuts as the start of a cycle of multiple cuts given sticky inflation holding above central bank targets.

All eyes are on the Fed policy meeting this week. We expect key data – like last week’s US payrolls and this week’s US CPI – to drive Fed decision-making. Even with easing likely on the horizon for the Fed and already underway elsewhere, this is not your typical rate-cutting cycle, in our view. The red-hot US payroll data reinforces what an unusual environment this is for the start of a global easing cycle. We don’t see central banks cutting far and fast.

Read our past weekly commentaries here.

Big calls

Our highest conviction views on tactical (6-12 month) and strategic (long-term) horizons, June 2024

Tactical granular views

Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, June 2024.

Our approach is to first determine asset allocations based on our macro outlook – and what’s in the price. The table below reflects this. It leaves aside the opportunity for alpha, or the potential to generate above-benchmark returns. The new regime is not conducive to static exposures to broad asset classes, in our view, but it is creating more space for alpha. For example, the alpha opportunity in highly efficient DM equities markets historically has been low. That’s no longer the case, we think, thanks to greater volatility, macro uncertainty and dispersion of returns. The new regime puts a premium on insights and skill, in our view.

Euro-denominated tactical granular views

Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, June 2024.

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Sources: Bloomberg unless otherwise specified.

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