As I wrote last time in our Invesco mid-year outlook, growth and inflation have continued to perform above expectations across most major economies. Our investment outlook for the rest of the year (read the full report here) centers on the path of inflation and how central bankers weigh the balance of risks in beginning to ease monetary policy. In my previous article, I focused on our outlook for the U.S. This time, I want to continue our mid-year report with a look at economies around the world.
Divergence has re-emerged as a theme, with individual economies likely to see various growth and inflation experiences going forward. We expect falling inflation across most economies in the second half, but at a trajectory that elicits only marginal interest rate cuts.
Eurozone: Substantial disinflation and improving economic momentum
Eurozone economic momentum has been improving despite tight monetary policy, a softer global economic environment, and numerous geopolitically induced economic headwinds. Purchasing Managers’ Indexes, which are forward-looking indicators, suggest to us a continued pick-up in growth toward trend rates, though with some variation in experiences within the eurozone itself. While the eurozone labor market appears to have softened somewhat, real wage growth has improved as inflation has fallen appreciably lower.
Growth in the eurozone has been weaker than in the US, while disinflationary progress has been more substantial.1 With inflation close to central bank targets, the European Central Bank (ECB) introduced its first cut at its June meeting, with more likely to follow but at an uncertain pace. This could also support growth going forward. Overall, the near-term European growth outlook has seen a modest pick-up, and we expect growth to gradually return to trend rates over the remainder of this year. We anticipate that ECB rate cuts should provide some catalyst to European cyclical assets and valuations.
U.K.: A tepid recovery and limited easing expected
We expect the United Kingdom to perform similarly to the eurozone but on a delayed timeline and with less near-term monetary policy easing. Activity has recently been improving, reflecting a tepid recovery as forward measures have been picking up. Disinflationary progress has also been improving, but to a lesser extent than in the eurozone.
The Bank of England (BOE) is expected to cut rates at least once before the end of the year as activity remains soft, but high inflation remains a challenging backdrop that is likely to limit further easing.
Japan: Stronger inflation could lead to more tightening
In Japan, the Noto Peninsula Earthquake and a suspension of some automobile shipments due to a local scandal caused a disruption in manufacturing activities in the first quarter. However, we expect a rebound in economic activities, supported by wage increases, improved manufacturing output and fiscal stimulus. In fact, the latest spring wage negotiations indicated a significantly higher pace of wage growth versus recent history, which we anticipate should help support consumption growth and lend support to continued normalization of inflation.
With inflation moderately stronger, we anticipate that the Bank of Japan (BOJ) will implement at least one additional rate hike by end-2024 and possibly initiate quantitative tightening as it is likely to see a higher probability of sustained 2% inflation.
We believe these factors are likely to spur global investors to raise their allocations to Japanese equities, helping to bring about a potential outperformance of Japanese stocks versus other developed market stocks in the second half. The weakness in the yen may continue in the short run, although policy easing by the Fed and tightening by the BOJ could mitigate the weakness in yen toward the end of this year.
China: On the lookout for positive growth surprises
In China, we anticipate an improving economic environment and ample room for positive surprises. Growth appears to be strengthening, helped by factors such as a recovery in exports and fiscal policy support.
However, property market-related problems – including further decreases in property investment, lower consumer sentiment, and a decrease in local government funding – pose significant structural challenges and risks to economic growth. Proper handling of property issues by the government will be even more important.
Recent growth has been supported by an improvement in external factors, as indicated by recent export growth.2 We anticipate that market sentiment is overly pessimistic, indicating a higher probability of growth surprises versus consensus expectations.
Emerging markets: A striking difference in opportunities across countries
Outside of China, emerging markets (EM) as a whole have faced a challenging global economic backdrop. Arguably, they’ve been hit harder than major economies by the wartime global commodity price shock, high inflation, and rapidly tightening global monetary policy. The Fed’s pivot back to a high-for-longer stance on interest rates, as well as a stronger dollar, have posed a challenge for many emerging markets.
Having said that, we continue to be constructive about relatively resilient growth and resolute efforts to bring inflation down. And once Fed rate cuts materialize, we anticipate lower rates and a weaker dollar should provide support to EM assets.
We emphasize a striking divergence in both macro and growth performance across EM countries as well as the compelling turnaround/hope stories among several important EM fallen angels. Accordingly, we argue for an active approach to EM to help capitalize on differences in fundamental macro features and country stories across the EM space, instead of a binary overweight/underweight passive style.
Kristina Hooper is Chief Global Market Strategist at Invesco. This is an edited version of the Invesco 2024 Mid-Year Investment Outlook.
Notes
1. Based on gross domestic product growth and consumer prices for the US and eurozone.
2. China’s exports rose 7.6% year-over-year as of May 2024. Source: China General Administration of Customs.
Disclaimer
© 2024 by Invesco Canada. Reprinted with permission.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
The opinions referenced above are those of the author as of June 6, 2024. These comments should not be construed as recommendations, but as an illustration of broader themes. This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
Forward-looking statements are not guarantees of future results. They involve risks, uncertainties, and assumptions; there can be no assurance that actual results will not differ materially from expectations. Diversification does not guarantee a profit or eliminate the risk of loss. All investing involves risk, including the risk of loss.
Diversification does not guarantee a profit or eliminate the risk of loss.
All figures are in U.S. dollars.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
All investing involves risk, including the risk of loss.
Past performance is not a guarantee of future results.
In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.
Commissions, trailing commissions, management fees and expenses may all be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Please read the simplified prospectus before investing. Copies are available from your advisor or from Invesco Canada Ltd.
Investment funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that any fund or security will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. The foregoing is for general information purposes only. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.
Image: iStock.com/bluebay2014
)
