Uncomfortable truths lie beneath current wave of market optimism

The current wave of optimism in the stock market, driven by election fever, hides a more uncomfortable truth, a report showed on Wednesday.

According to Saxo’s second quarter outlook, titled ‘2024: The wasted year’, the global economy is in a delicate state, with debt accumulation outpacing GDP growth. “Central banks around the globe are tightening the purse strings, which, when combined with high real interest rates and the mountain of existing debt, could spell trouble for our economic momentum,” the report said.

In his macro note, “It’s all about elections and keeping status quo,” Steen Jakobsen, Saxo’s chief investment officer, emphasises that “election optimism and a rally in equities have so far masked the inconvenient truths underlying our economy, where debt continues to grow faster than GDP.”

Damian Hitchen, CEO, Saxo Bank Mena, said: “It is important to understand the intricate balance between election optimism and underlying economic realities. In a delicate economic landscape where debt surpasses GDP growth, it is imperative for investors to stay informed and adopt a strategic approach to navigate potential market volatility. Through this outlook, we aim to equip investors in the Mena region with valuable insights to make informed decisions and seize growth opportunities while mitigating risks effectively.”

Commodities: Is the correction over?

The commodities market is showing signs of recovery after the year-long consolidation period that followed a significant growth spurt from 2020 to 2022. This potential turnaround is buoyed by the anticipation of rate cuts from major central banks, which may soften the US dollar and reduce funding costs, thereby fuelling growth. Notably, the metals sector, particularly gold and silver, has already started to rebound, benefiting from robust demand and the prospect of more favourable financial conditions.

Looking ahead, the outlook for commodities - especially metals - remains positive. “We maintain our 2024 call on gold to reach USD 2,300 per ounce,” says Ole Hansen, Saxo’s head of commodity strategy, with gold potentially climbing as high as $2,500. Copper, dubbed the “King of Green Metals,” is also on track for success, driven by steady demand and the threat of supply disruptions. Lower funding costs and economic support measures in places like China could further bolster the market for selected industrial metals, setting the stage for a broader commodities rebound.

Fixed income: Keep calm, seize the moment

As the global economic pace moderates and inflation rates begin to decline, central banks might ease their stringent monetary policies, possibly cutting interest rates in the near future. This scenario presents a compelling reason for investors to consider extending the duration of their portfolios, although caution is advised for very long-term investments due to persistent inflation concerns.

The fixed income landscape offers various opportunities adaptable to different macroeconomic conditions. Althea Spinozzi, Saxo’s Head of Fixed Income Strategy, says that “despite fiscal concerns, sovereign bonds continue to demonstrate their value as a portfolio hedge,” underscoring the resilience of these investments amid economic fluctuations. With the bond market presenting attractive valuations and yields near 15-year highs, investors have a valuable chance to navigate through the challenges of the current economic environment.

As Q2 2024 unfolds, it’s important to have a balanced and strategically diversified approach to investment. With a year full of major elections, it isn’t just “about playing the markets, but rather recognising the narrative driving investor sentiment,” Jakobsen concludes. With an increased focus on fixed income and commodities and adjustments to equity exposure across geographies, Saxo’s strategy aims to weather potential volatility while seizing growth opportunities.