The interest rate cut made in September by the U.S. Federal Reserve (Fed) is marking a shift in market trends heading into the final quarter of the year. According to some international asset managers, while the move is gradual, the beginning of the global shift in monetary policy could be accompanied by the end of the leadership of technology stocks and cash.
This is the interpretation from Allianz GI, for example, whose fourth-quarter outlook suggests that we may be entering a period of below-potential growth, where downside risks will naturally increase. “After a period of relative calm in the markets, despite some spikes in volatility, investors should be prepared for a possible return of structural volatility in 2025,” they state at Allianz GI.
Despite their cautious tone, Allianz GI clarifies that these early signs should not be interpreted as a negative signal for equity markets. “As inflation and interest rates decrease, this trend is likely to be positive for quality and growth stocks. We expect these styles to register better returns in the coming months. Volatility is likely to rise in the final stretch of the year, especially considering the U.S. elections in November, so it could be a good time to carefully consider some defensive positions to balance portfolios,” says Virginie Maisonneuve, Global Chief Investment Officer of Equities at Allianz GI.
For Chris Iggo, CIO Core Investment Managers at AXA Investment Managers and Chairman of the AXA IM Investment Institute, “the bull market could extend well into next year.” In his opinion, the Fed is doing a great job, and market prices should reflect the weighted probability of all potential outcomes. “We do not know the likelihood of abrupt changes in market confidence, erroneous economic data, or the impact of the upcoming U.S. elections. If markets are rational, the current price is the best of prospects. Betting against that could be risky,” Iggo says.
In fact, he believes that most investors should be more satisfied with growth equities now that interest rates are heading toward 3%. “It is better to own equities when analysts confidently revise upward their earnings-per-share expectations than when rate hikes threatening a recession cut forecasts, as happened in 2022,” he argues.
Stephen Auth, CIO of Equities at Federated Hermes, explains that the Fed has realized that “it needs to start cutting aggressively to prevent a hard landing from turning into a full-blown recession,” and that “if the economy continues to slow down as we expect, there will surely be more cuts.” His main conclusion is that this new cycle of rate cuts will benefit value and small-cap companies, as opposed to growth.
“The market expects an additional 75 basis points of cuts by the end of the year, and another 125 in 2025. We see at least this much ahead. All of this is good news for value and small-cap companies, which, unlike the large cash-rich tech companies in the growth indices, primarily finance themselves using short-term interest rates. But investment flows to this side of the market will depend on the Fed continuing to act aggressively and signs suggesting that the current economic weakness is stabilizing at pre-recession levels,” he argues.
Investment Opportunities
In Maisonneuve’s opinion, UK stock valuations appear attractive and could benefit from rate cuts and political stability. Additionally, technology and small-cap companies could perform well in a rate-cutting, moderate-growth environment. She also believes that water-related stocks are good defensive opportunities in this context, as they are closely tied to a natural resource and are not influenced by the market.
“In general, we continue to pay special attention to the Asia region. Within equities, we prefer Japanese stocks due to ongoing structural reforms and the country’s recent stock market crisis, the second largest in its history. Moreover, companies are revising their profits upward, increasing dividends, and buying back shares. In China, the apparent recovery of the real estate market could act as a catalyst for stocks, which mostly trade at very attractive prices. There is no doubt that geopolitics continues to pose certain challenges, as the potential escalation of current trade tensions could affect confidence. Therefore, we expect a more favorable environment for Chinese equities in the fourth quarter of 2024,” Maisonneuve explains.
The Allianz GI expert also refers to India, where she believes the valuation premium of stocks is more than offset by the country’s strong growth. “The fundamentals are very solid, especially the region’s favorable demographics, with a large workforce and an average age of just 28 years, suggesting positive economic prospects for the coming years,” she concludes.
For his part, Iggo adds that “optimism is spreading, and equity markets are reaching new highs. The frenzy around artificial intelligence (AI) may have subsided, but the revolution is underway, and we shouldn’t rule out upside surprises in tech earnings in the third quarter and in 2025.”
For Marcelo Soba
For Beatriz Zúñiga
For Gabriela Huerta