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‘‘What will the descent from peak rates look like?” – Investment Perspectives Mid Year 2024 Outlook

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In this outlook, M&G Investments’ Fabiana Fedeli, Jim Leaviss, Richard Woolnough, Emmanuel Deblanc and others explore the potential implications of the evolving interest-rate backdrop for financial markets.
‘‘What will the descent from peak rates look like?” – Investment Perspectives Mid Year 2024 Outlook

So far this year, investors have had to temper their expectations for interest rate cuts as policymakers have kept rates on hold in response to higher-than-expected inflation. However, changing rate expectations have resulted in different outcomes for fixed income and equity markets: most bonds have been weak, but equities have moved higher, with some markets rallying to record highs.

As we approach the second half of 2024, major central banks are moving closer, or in some cases have already started, to cut rates. Here, M&G’s chief investment officers (CIOs), fund managers and investment experts explore what this evolving backdrop might mean for financial markets.

Bringing together perspectives from different asset classes, we seek to connect the dots and illuminate the complex investment landscape.

Amid macroeconomic and political uncertainty, the path down from peak rates could be bumpy but we believe there is currently a wide array of promising opportunities for patient selective investors, across public and private markets.

After ticking up at the start of the year, recent data indicate that inflation in the US is now on a downwards trajectory. For the fixed income team, led by Jim Leaviss, inflation moving in the right direction provides support for the prospect of rate cuts by the US Federal Reserve (Fed) this year. Such cuts could be an opportunity for fixed income investors to capture potentially attractive gains, the team believes.

According to Richard Woolnough, manager of the Optimal Income strategy, the current rates/inflation dynamic represents an attractive risk-reward opportunity to invest in duration-bearing assets (such as US government bonds).

However, there are potential obstacles on the road to lower rates, including a resilient economy, a strong jobs market and the forthcoming US presidential election. We might see a resurgence of inflation, particularly as both candidates are talking about increasing tariffs. Moreover, we could also be entering a new era of structurally higher inflation, which might mean interest rates settle at a higher level than they were prior to this rate-hiking cycle.

Fabiana Fedeli, CIO for equities, multi asset and sustainability, believes the current backdrop is also still favourable for equity markets. As always, selectivity remains key. While we seem to be at peak rates, the timing of rate cuts is uncertain and, importantly, one rate cut will not necessarily mean a sequence of cuts will follow as policymakers may pause to assess the impact.

Fedeli firmly believes in the power of innovation as a driver of business and investment returns. However, with the valuations of many ‘headliner’ companies at the forefront of innovation having risen spectacularly over the past year, she believes investors need to dig deeper and broaden their search to discover those hidden gems of innovation that are offering differentiated products and solutions, and creating a competitive edge for themselves across the globe.

The most significant issue impacting many private markets has been the rise in real interest rates, says Emmanuel Deblanc, M&G’s new CIO of private markets. While higher rates reduce distributions to investors and put pressure on valuations, Deblanc believes that over the long-term this has actually been positive for private markets: it avoids the misallocation of capital, fundamental in correctly pricing assets.

Despite these challenges, Deblanc believes opportunities persist in the ‘value add’ and opportunistic areas of private markets, such as real estate and infrastructure.

The real estate market could continue to recover this year, argues Richard Gwilliam, head of global real estate research, although he believes a focus on income and asset quality will be important in the new cycle. Meanwhile, head of real estate finance, Dan Riches, believes that real estate debt also looks attractive in the current environment. This is partly due to the ongoing retrenchment by banks from lending in certain areas.

Structured credit has also benefited from this trend in recent years and James King, M&G’s head of structured credit, believes the asset class is set to continue growing. By offering investors access to pools of high quality performing loans, it could be attractive in the face of an ever-changing investment landscape.

Catherine Ross, head of private credit, notes that direct lending has also stepped in to fill the void left by banks’ retreat from lending. In her view, the asset class has enduring appeal, based on deeper due diligence which can limit the risk of borrower default.

Staying active

The investment outlook remains uncertain and potential challenges lie ahead. But by adopting a longer-term investment horizon, we believe active and disciplined investors can position themselves for future success and even reap rewards when volatility is elevated.

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