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Mid-Year Outlook 2024

Navigating the Fixed Income/Yield markets

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Xavier Baraton

The increasing influence of geopolitical factors on markets signals a shift to a new era with more volatile inflation and lower potential growth.

We explore:

Sticky but not stuck inflation

Since the start of the year, inflation data has re-accelerated. Hotter inflation prints are due to the services sector, especially shelter costs. But leading indicators point to a resumption of disinflation trends through the rest of 2024.

Geopolitics key in a multi-polar world

Economic power is shifting to Asia and emerging markets. Tariffs and protectionist measures are on the rise. Economic statecraft has become the new normal. How can investors assess geopolitical risk in the current environment?

Emerging markets back in fashion

Emerging markets have been impressively resilient to the higher-for-longer interest rate environment, China growth challenges, and the stronger dollar in 2024. For investors, the new multi-polar world means that being granular in geographies will be more important.

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A ‘soft-ish landing’ remains our baseline scenario envisioning a moderate economic slowdown that avoids a severe recession. This means that inflation, which has been sticky, ‘unsticks’ itself. This is why we remain cautiously optimistic.

A combination of cooling demand, weaker profits and modest rate cuts could be a tricky situation for risk markets to navigate. We opt for a focus on fixed income and prioritise alternative sources of portfolio resilience.

We introduce three key themes to consider:

	Real role for real assets Economic shifts create a more volatile inflation environment in the medium term with profound implications for stock-bond correlations.
	Return of fixed income Higher yields and potential capital appreciation amid rate cuts and disinflation point to better fixed income returns in the second half. Furthermore, should economic growth disappoint, it may help boost bond returns, which could improve portfolio resilience.
	Emerging market leadership Valuation discounts and broadening global growth create an opportunity for emerging markets to lead. While key issues are the direction of US interest rates and the dollar, emerging markets are becoming less US-centric.

The level of yield is not guaranteed and may rise or fall in the future. Past performance does not predict future returns.

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