As central banks around the world pivot toward reducing interest rates, the global economy is set to transition into a lower-rate environment, potentially easing pressures from inflation.
While this shift might signal the end of an era of high borrowing costs, the outlook remains complicated by persistent challenges, including sticky inflation in certain sectors and geopolitical uncertainties.
For advisers, the task is to face this evolving landscape thoughtfully, helping clients capture opportunities while mitigating risks.
Although rate cuts are widely expected, they will not act as a panacea.
Services inflation, in particular, remains a thorn in the side of policymakers. While overall inflation rates have declined from their peaks, the stickiness in services – driven by wage pressures and supply chain disruptions – continues to trouble central banks, particularly in advanced economies.
For the global economy, this persistence suggests that even as headline inflation cools, we are likely to see a more protracted struggle with inflation in specific sectors. This means that while rate cuts may alleviate some immediate pressures, inflation concerns will continue to influence central bank decisions and market behaviour well into 2024.
Advisers should be attuned to these nuances. A lower-rate environment might seem like a green light for equities, but underlying economic realities, such as uneven growth and inflationary pressures, complicate the picture.
For instance, in the US, recession fears have somewhat abated, but the recovery remains fragile. Meanwhile, the economic landscape in Europe paints a mixed picture.
Market turbulence
While manufacturing-oriented economies are showing signs of weakness, services-driven economies such as the UK are recording more solid growth. These discrepancies create both opportunities and risks that require a nuanced approach when advising clients.
Equities, which have performed strongly throughout 2024, may continue to be the asset class of choice, but advisers should be cautious.
European stocks, as tracked by the Stoxx 600 index, have rebounded nearly 10 per cent year-to-date, hitting record highs, while the US S&P 500 has gained 17 per cent so far in 2024. However, these gains have come amid a broader backdrop of market volatility.
Turbulent markets are likely in the near term, driven by a variety of factors, including corporate earnings, geopolitical developments, and sector rotations.
Recent enthusiasm for artificial intelligence stocks, for example, has contributed to equity market momentum, but it also raises the possibility of an overdue correction.
Investors may be tempted to ride the wave of price momentum, but this is exactly where advisers need to provide measured counsel. Rather than chasing short-term gains, a focus on quality investments and long-term value is crucial.
The potential for sector rotation also presents both opportunities and risks.
For clients with significant exposure to high-flying sectors like technology, it may be prudent to consider reallocating some capital toward more defensive sectors, such as healthcare or utilities, which could provide stability in a volatile market.
While equities remain attractive for the rest of the year and beyond, diversification across sectors will help protect portfolios from the inevitable ebbs and flows of market cycles.
