Still optimistic but with modest expectations

The core scenario that emerged from our assessment is that the worst risks will likely be avoided. We see a slight economic slowdown – and a modest subsequent recovery. With inflation falling significantly, the U.S. Federal Reserve (the Fed) and Europe's central banks will be able to cut interest rates: Our expectation is five 25 basis point (bp) cuts by the European Central Bank (ECB) and six by the Fed (including the expected interest rate cuts this September). For government bonds this means we expect yields to fall at the short end but rise slightly at the long end. Given the high yields we are starting with, however, the total yields for all major government bonds should remain clearly in positive territory. We continue to favor the medium maturities. Corporate bonds continue to look very attractive in our view. During the phase of weak economic growth, we favor the investment grade (IG) segment, especially in Europe. In currencies we do not expect any major moves in the most important pairs over the next twelve months. This could change after the U.S. election, especially if Donald Trump wins. However, we stand by our assessment that the Democrats have a better chance of winning the White House, but that the Senate could fall into Republican hands, which would severely restrict the new government's legislative room for maneuver. 

Provided there is, as we expect, no marked slowdown in the U.S. economy or a shock on the interest rate side, equity prices should continue to move sideways with a slight upward trend. Their rock will be the U.S. consumer once again. Solid corporate earnings (we expect 10% growth over the next twelve months) look so far likely to cushion equities from major downside risks; stable labor markets and the prospect of interest rate cuts by the central banks are a further support. Globally we have a slight regional preference for Europe based on the record high valuation gap it has versus the U.S. We see better growth opportunities in the U.S. but value and small caps are particularly interesting in Europe. In Japan, meanwhile, inflation after years of deflation and corporate reforms are bearing fruit. In emerging Asia, with the exception of a few sectors, we are primarily looking outside China. On a sector basis, we have downgraded telecoms service providers, which have become quite expensive, to neutral. AI is still a remarkable source of dynamism when you look at the investment plans of the largest buyers of AI semiconductors, for example, but the market is also beginning to question the speed at which AI can be monetized. However, healthcare, an older sector, is delivering good growth at a reasonable valuation and is likely to be less at the center of the U.S. election campaign this time. We have moved it to Overweight.

Among alternatives our gold forecast of USD 2,810/ounce (oz) reflects continuing central bank buying. Our Brent oil forecast of USD 80 per barrel assumes there will be no major supply side shortages. In real estate, prices are stabilizing and, in some cases, even rising. Logistics and residential property are benefiting from strong structural demand drivers in all regions. We also see upside potential for private loans, an increasingly popular source of financing for companies

All in all, it looks as if we are in for a prolonged, albeit tepid, economic upswing that will be favorable for most financial assets. But there are considerable risks to our hopeful central scenario and we continue to focus on broad diversification of our investments. This approach may help provide secure income streams for investors even in a poor capital market environment – for example via stocks that pay good dividends and relatively high-yielding corporate bonds – and it also may allow investors to participate in the growth of the economy and of the corporate profits that we expect in 2025.