Global wealth and asset manager Lombard Odier has just published its latest CIO office viewpoint which outlines the bank’s 10 Investment Convictions for the second half of 2024.
Against a moderately healthy macroeconomic backdrop, with
equities hovering around record highs, in contrast to rising
political risks, Lombard Odier looks at
how investors should navigate the second half of 2024.
The investment manager believes that the investment environment
will be driven by the disinflation trend and the path of interest
rates will focus on political risks, notably the US elections and
geopolitical competition. The prospect of such changes should
translate into episodes of market volatility.
Against this background, Lombard Odier outlines its 10 investment
convictions for the rest of the year.
1. Keep portfolio risk tactically neutral, adjust
exposures as opportunities arise
The firm’s macroeconomic scenario is constructive for financial
markets but given geopolitical risks in the second half of 2024,
it wants to be risk conscious and position for a range of
economic and market scenarios. Therefore it is
keeping portfolio diversification at the core of its
strategy. Bouts of risk aversion may trigger temporary drops in
high equity-bond correlations, which argues for a balanced
exposure to high quality bonds. However, such instances may open
up opportunities in other risk assets and the firm stands ready
to invest in those as they arise.
2. Capital gains in fixed income should improve
modestly
Fixed income, which can provide an income stream for conservative
investors, is a useful instrument to lock in high yields for
buy-and-hold investors. Nevertheless, interest rate cuts have
started and should extend as inflation falls in the second half
of 2024. The firm expects modest bond prices gains (adding some
returns on top of coupons), as yields fall. The European Central
Bank and the Bank of England are likely to cut rates before and
to a larger extent than the Federal Reserve. The firm prefers
German Bunds and UK gilts over US Treasuries (hedged against the
portfolio reference currency). Lombard Odier prefers bonds with
five- to seven-year maturities, as these stand to gain from the
start of policy easing, but suggests a flexible approach to
managing the duration of bond exposures, especially in the US,
given uncertainty over politics, fiscal policies and inflation.
3. Seek opportunities for carry with selected bond
exposures
Political risk and the start of the US presidential election
campaign could keep volatility elevated. With spreads already
tight, returns from corporate credit could be limited in the near
term. Throughout the second half of 2024, however, opportunities
could arise to capture carry (a pickup in yields). Within
investment grade (IG) bonds, the firm likes euro over US dollar
denominated bonds on a dollar hedged basis, which helps extract
additional carry. It believes that select crossover (BBB/BB
rated) credit offers a good risk-reward in an environment of
improving growth and disinflation. Lombard Odier also prefers
emerging market (EM) hard currency corporate bonds over EM
sovereign debt, as EM credit offers better diversification and a
higher rating quality. The yield premium over EM sovereign bonds
(excluding those rated-CCC) also remains attractive.
4. Favour cyclical stocks
Equities look set to offer more upside than bonds over the course
of the year, but concentration in the US market and geopolitical
risks have increased and could trigger near-term volatility.
Lombard Odier sees equities being supported by high single-digit
earnings” growth and rate cuts in 2024, and stands ready to take
advantage of opportunities in selected cyclical sectors, notably
energy, materials, consumer discretionary and communication
services. The firm believes that its sector preferences could
evolve in line with US election outcomes.
5. Lagging regions and sectors to catch up
In the first half of the year, Lombard Odier built exposures to
fairly priced markets that had lagged a generally strong equity
performance to date. The UK stock market was a first step in this
direction. It offers reasonable valuations, decent earnings’
growth, a sound macroeconomic outlook (interest rates
heading lower, weak sterling) and potential inflows as a
result of domestic pension reforms. The firm believes that
selected EM equity markets could also offer fairly priced growth
exposure, highlighting Taiwan, South Korea and India. Lombard
Odier’s least preferred region remains the eurozone, which
recently suffered from the political uncertainty triggered by EU
elections, and should continue to trail world indices on weaker
earnings prospects.
6. Thematic equity exposures can help increase portfolio
resilience
For investors keen to build more portfolio resilience and capture
longer-term growth drivers, Lombard Odier believes that its
thematic equity framework offers new opportunities. This builds
on its analysis of transformations underway in economies and
societies – from changes in longevity, demographics,
infrastructure, and the sustainability transition – and seeks to
capitalise on the listed equity opportunities that flow from
them. Investors willing and able to withstand some short-term
volatility in this portion of their portfolios can build exposure
to the firm’s preferred thematic stocks.
7. Continued dollar strength
The dollar benefits from a yield advantage over other G10
currencies and from relatively weaker growth outside the US. This
is likely to remain the case in 2024. However, US political and
related fiscal risks, the dollar’s overvaluation, the progressive
rise of gold at the expense of the dollar among central bank
reserve allocations and a multi-polar world cast some doubts over
the longer-term sustainability of dollar strength. Nevertheless,
it thinks that the dollar will continue to appreciate versus the
euro and sterling in 2024, as solid US growth, a faster European
rate-cutting cycle and cost of carry will continue to provide an
edge to the dollar, which also helps to diversify portfolios.
Lombard Odier sees the euro losing ground against the Swiss franc
even if a near-term consolidation is likely, as interest rate
differentials narrow and geopolitical risks justify demand for
other safe-haven assets.
8. Commodity prices could see solid gains
ahead
Amid geopolitical uncertainty, safe and reliable access to
natural resources is imperative, especially as the draw on these
resources will be heavier in the transition to a net-zero
economy. The firm sees lasting shifts in commodity markets.
Industrial metals, especially copper, face new structural demand
from electrification and the expansion of data centres required
by the rise of artificial intelligence. Alternative building and
packaging materials such as timber should also see growing demand
as the rise of carbon prices and the expansion of carbon trading
markets increasingly allow natural resources to be fairly valued.
The complex geopolitical and financial environment makes gold
more important for central banks as a reserve asset. Lombard
Odier expects gold prices to remain supported, despite a
resilient dollar – as the two often move in inverse directions.
Bouts of risk aversion could hamper commodity prices, but it
would use price weakness to (re)build exposures to industrial
metals.
9. Alternative strategies can offer income and
diversification
For Swiss franc investors, Lombard Odier thinks the low level of
bond yields can continue to support listed Swiss real estate
funds, which currently offer an attractive yield pick-up over
Swiss sovereign bonds. In hedge funds, the firm’s conviction in
global macro and trend-following strategies remains strong, but
it also seeks to capitalise on a broader array of opportunities.
These include strategies that are designed to take advantage of
heightened corporate activity, including mergers, acquisitions
and restructuring (event-driven strategies) and long-short equity
strategies, as the environment for stock picking improves in a
normalising macroeconomic environment and a return of volatility.
10. Private assets can strengthen portfolios for eligible
investors
For investors with a long-term investment horizon and the ability
to hold investments that may not be easy to buy and sell, Lombard
Odier believes that private assets can play a valuable role in
diversified multi-asset portfolios. The inclusion of the asset
class can enhance portfolio returns, lower volatility and improve
diversification, as well as provide access to innovative and
fast-growing companies that are increasingly staying in private
hands rather than seeking to list on public markets.