Amidst easing global inflation, surprisingly resilient growth, and forthcoming elections in Europe and the US, the global economic outlook is marked by contrasts and shaped by powerful geopolitical fault lines, including Russia’s invasion of Ukraine, tensions in the Middle East and the November US presidential vote, which could significantly impact US-China relations.

The global investment outlook is likewise far from symmetrical. In the eurozone, the European Central Bank’s first interest-rate cut since September 2019 is expected to prove supportive, with further cuts anticipated over the next six months. By comparison, stickier inflation in the United States – and a subsequent delay to the start of the US Federal Reserve rate-cutting cycle, now likely to commence around the end of 2024 – is contributing to economic deceleration. That is expected to be a drag on some US-dominated asset classes, such as high-yield bonds.

That is the view of Daniele Antonucci, Chief Investment Officer at Quintet Private Bank, which today highlighted its forecast for the global economy and financial markets over the second half of 2024 and beyond.

“We now expect the eurozone economy to expand by more than 1% this year, which is up from our earlier forecast and slightly above current consensus,” Antonucci said. “Meanwhile, we have lowered our full-year forecast for the US economy to 2%, slightly below current consensus.

“What is important to note here is not that the European economy is only expected to grow at half the rate of the US. Rather, it is the change that matters most: Conditions in the eurozone are improving, while they are deteriorating in the United States, although we do not see a US recession on the horizon. We expect those asynchronous trends to be reflected in markets over the balance of this year and beyond.”

Quintet remains slightly overweight on equities overall – with its single greatest exposure to US equities, reflecting longer-term megatrends in areas such as artificial intelligence. The private bank also continues to maintain its global small-cap equity position, reflecting attractive valuations and the favorable economic backdrop.

By comparison, Quintet remains slightly underweight on European equities. While the fundamental outlook is improving in Europe and a case could be made that increased exposure to European equities is now warranted, Antonucci noted that political uncertainty could increase in the near term, given the potential ramifications of recent European elections and upcoming French elections. “Reflecting our commitment to seek to protect and grow client wealth,” he said, “we will maintain our slight underweight on European equities and then reassess once current uncertainty clears.”

Like in the eurozone, the UK economic outlook has improved since the start of the year. Recession risk there has significantly decreased, according to Antonucci, who now expects full-year UK growth to nearly reach eurozone levels. Quintet’s UK growth expectations are up from its earlier forecast and slightly above current consensus. Antonucci believes the upcoming UK election is unlikely to be market-moving, as the main parties are centrist, but says that investors will keep an eye on potential individual fiscal measures.

Meanwhile, growth in the massive Chinese economy appears to be stabilizing. However, China continues to grapple with structural challenges such as a poor demographic outlook and property sector crisis. Other emerging markets such as India, however, continue to have solid long-term potential. That mixed picture is one of the reasons why, overall, Quintet is neutral on emerging-market equities.

Turning to fixed income, Quintet’s Chief Investment Officer sees global high-yield valuations as currently expensive, while European investment-grade bonds appear more appealing.

Focusing on currencies, Antonucci said: “If eurozone or UK rates were to fall significantly below US rates, the euro and pound sterling would risk depreciating versus the US dollar, as exchange rates tend to be driven in the near term by interest-rate differentials. If that were to happen, import-price inflation would accelerate in the eurozone and the UK, which would put the inflation objectives of the ECB and Bank of England at risk.”

He noted, however, that this is not the firm’s base-case scenario. “We expect the euro and pound sterling to hold steady versus the US dollar in the near term, with some recovery anticipated on longer horizons.”

Concluding with commodities, Quintet’s Chief Investment Officer said: “Gold may currently be slightly overvalued but continues to serve as a valuable strategic hedge, as do broad commodities, given geopolitical risks.”