Weekly market commentary

We see a world shaped by supply, with structural forces set to keep inflation pressures persistent and interest rates high for longer. We favor infrastructure equity, like stakes in airports and data centers, in our strategic views as it could benefit from such forces. The impact of policy changes after the U.S. election could reinforce geopolitical fragmentation and ongoing budget deficits. We stay cautious on long-term U.S. Treasuries and expect yields to rise long term.

Infrastructure stands out
Change in private market valuations, 2001-2024

The divergence in how private markets have reacted to higher interest rates has shaped our views on a strategic horizon of five years and longer. We had been overweight income private markets, like private credit, relative to growth assets for about two years. We expected higher rates and financing costs to boost returns for investors in private debt with floating interest rates. Now we go neutral income assets as spreads tighten, yet private markets stay a sizeable part of our strategic portfolios. Within equity-like growth private markets, private equity and real estate valuations have peaked after decades of falling financing costs. See the chart. We upgrade growth assets to neutral as valuations cool from financing costs rising with rates. We still like infrastructure equity as we see fewer signs of lofty valuations (orange line) and it looks set to benefit from mega forces, or structural shifts.

Mega forces are playing a bigger role in shaping markets and economies – and driving returns now and in the future. Some of President-elect Donald Trump’s proposed policies, such as large-scale tariffs, reinforce why we see persistent inflation in the medium term and interest rates staying above pre-pandemic levels. If implemented, those policies could reinforce geopolitical fragmentation and economic competition. Plans to reduce legal immigration could impact the labor market. And we expect persistent budget deficits – one factor we see pushing up long-term U.S. Treasury yields.

Staying selective strategically

As mega forces collide, we get more dynamic – even in our strategic views. In addition to our evolving views on private markets in Q3, we stay positive on direct lending, or directly negotiated loans to small- and mid-sized firms, as the future of finance unfolds. Demand for private credit could rise as banks limit lending. But private markets are complex and not suitable for all investors. Valuations matter more over a strategic horizon. That’s why we prefer attractive valuations in emerging market (EM) stocks over developed markets (DMs). We favor EMs like India that sit at the crosscurrent of mega forces. We still like Japan within DM stocks and are neutral on DM overall given richer valuations. Our preference for short-term bonds and UK gilts keeps us overweight DM government bonds. We stay underweight long-term U.S. Treasuries on a strategic horizon as we expect yields to rise over time. We see investors demanding more term premium, or compensation for the risk of holding them, given sticky inflation, persistent fiscal deficits and greater bond market volatility.

While the long-term outlook is uncertain, we’re more pro-risk on a six- to 12-month tactical horizon. That’s supported by a more favorable macro backdrop and upbeat investor sentiment given post-election clarity and hopes for deregulation. We think the energy, financial and tech sectors can benefit. We stay overweight U.S. stocks and think the artificial intelligence theme can expand beyond the tech sector.

Our bottom line

We are in a world shaped by supply and mega forces. The U.S. election result reinforces that view. We see infrastructure equity benefiting from mega forces as we update our strategic views (for professional investors).

Market backdrop

U.S. stocks slipped last week after reaching new all-time highs, with tech shares leading the retreat. The S&P 500 is still up 23% this year and 1% since Donald Trump won the U.S. presidential election. U.S. 10-year Treasury yields climbed, notching new six-month highs above 4.5%. Federal Reserve Chair Jerome Powell indicated the central bank is in no hurry to cut interest rates given the economy’s strength. Market pricing of Fed rate cuts is now more in line with our view.

Global flash PMIs for November will give clues on the current state of uneven global growth, how the robust U.S. economy is faring in Q4 and whether the euro area is showing more signs of life after stronger-than-expected Q3 GDP. Markets will also be watching UK CPI out this week. The Bank of England recently cut its policy rate for the second time this year on sharply slowing inflation and some concerns over the growth outlook.

Big calls

Our highest conviction views on tactical (6-12 month) and strategic (long-term) horizons,
November 2024

Tactical granular views

Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, November 2024

Our approach is to first determine asset allocations based on our macro outlook – and what’s in the price. The table below reflects this and, importantly, leaves aside the opportunity for alpha, or the potential to generate above-benchmark returns. We don’t think this environment is conducive to static exposures to broad asset classes but creates more space for alpha.