The global economy has seen the emergence of diverging trends this year, mostly on a regional basis, with strong growth in the US and slightly contractionary growth elsewhere in developed markets, according to Baer. For the rest of 2024 and going into 2025, the bank expects to see the global recovery becoming stronger.

“In the US, the disinflation process has proved to be bumpier than expected. However, it is underway, and it is set to continue, even if at a slower pace than in the eurozone,” Baer said in a note. Central banks, which tightened monetary policy in unison to curb the inflationary spike during the Covid-19 pandemic, are likely to follow different paths when cutting interest rates.

The US Federal Reserve faces a tough decision on the appropriate timing of the first rate cuts, given the limited impact of monetary tightening so far and the uncertainty about the future path of disinflation. 

Baer expects a first rate cut in the US before the end of this year. “In the eurozone, on the other hand, the disinflation process is well advanced and justifies the earlier start to the European Central Bank’s rate-cutting cycle,” the bank added.

Equities
Baer has a positive outlook for equities, based on an emerging growth cycle, with the US still expanding, industrial production in China rising, and global restocking supporting trade and European economies. The bank still favours quality growth stocks but would consider allocating fresh capital to more cyclical stocks. “The second half of the year offers significant promise, with geopolitical fears and election concerns leading to more volatility but also potentially providing attractive entry points,” the bank said.

The US equity market remains Baer’s top choice due to the country’s continued growth and favourable investment environment. While the Magnificent 7 stocks – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla – have been the leaders, their earnings' growth is expected to slow, with stronger earnings' momentum anticipated in the rest of the market, including mid-cap stocks. “US equities beyond the Magnificent 7 are expected to benefit from ongoing economic growth, investments in artificial intelligence across industries, re-industrialisation, and the development of a greener economy,” the bank added.

Within emerging markets, Baer likes India. It believes that India remains a compounding growth story over the long term. As for Chinese equities, the bank highlighted how they have rebounded sharply from their January lows and are enjoying positive momentum. Therefore, they have a tactical overweight view on Chinese equities which is underpinned by low valuations.

Baer also thinks that structural reforms are a game changer for Japanese equities, which are benefiting from the amount of capital being channelled into making it the next semiconductor hotspot. With the currency at multi-decade lows, Japan is a destination for tourists and a good opportunity for investors to build exposure to a structurally attractive market that is showing strong earnings growth. The bank believes that it is not too late to invest in Japanese equities, even after their rise. The same holds true for global equity markets overall.

The bank has a preference for quality growth stocks closely tied to the durability of the artificial intelligence investment cycle, which benefits from companies integrating new AI-powered tools to optimise functions, cut costs, and ultimately improve the value added for their clients. “The investment boom triggered by AI is very real and keeps demand for cloud services and cutting-edge semiconductors strong,” Baer said.

With the strength of the US economy and positive cyclical signs from Europe and China, Baer believes that mid-caps, which as a group are more cyclical, are joining the rally and offer catch-up potential. The bank favours quality within mid-caps, as high financing rates will continue to challenge lower-quality, more-indebted companies.

In terms of sectors, Baer is focusing on industrials. Its positive view is based on a number of factors, including (i) attractive valuations that are tied to both structural growth themes, such as electrification, and to positive cyclical drivers, for example Chinese credit impulses that favour European industrials; (ii) an accelerating restocking cycle; and (iii) leading economic indicators that point to growth.

Baer sees earnings' growth for the companies in its next generation automation and robotics theme, which benefits not only from structural factors but also from positive cyclical drivers. The theme has many industrial companies as thematic leaders, and their earnings are expected to benefit disproportionately from greater order intakes.

Fixed income
Baer highlighted how the world has changed for bond investors over the past four years, as massive fiscal stimulus has vastly increased the supply of government bonds. With central banks no longer being the buyers of last resort, Baer thinks that the (over) supply of government bonds is likely to result in higher yields for longer, albeit with large swings. “Investors will need to become more agile and tactical. In the new environment, however, bonds will be bonds again, returning to their role as income generators and diversifiers in a multi asset portfolio,” the bank said.

Currencies
Baer believes that higher-for-longer interest rates in the US should make any dollar weakness temporary until the US elections, despite the cyclical upswing in the global economy. “Higher yields, later interest rate cuts, and the cyclical superiority of the US economy argue in favour of the dollar for now. Additionally, elevated geopolitical risks are likely to inject volatility into financial markets intermittently, benefiting safe-haven currencies such as the dollar and the Swiss franc,” the bank continued. This is bound to make it difficult for cyclical currencies, such as the euro, to appreciate sustainably before the run-up to the highly uncertain US elections.

Gold
While higher interest rates make it more costly to hold gold, investors like the traditional safe haven metal to protect assets from threats such as financial sanctions by central banks, the Swiss bank said.

“This has greatly improved the risk/return profile of gold, making it not only an efficient diversifier in a multi-asset portfolio but also a hedge against an exogenous systemic risk in a multipolar world,” it added.