Paris-based Edmond de Rothschild Asset Management has just published its investment outlook for the second half of 2024. It is marked by an “almost ideal” economic environment and new political obstacles.

Against a more favourable anticipated environment for capital markets, Benjamin Melman, chief investment officer at Edmond de Rothschild Asset Management, is optimistic about the outlook for bonds and equities in the second half of 2024.

“Looking at the performances recorded year-to-date, history appears to be repeating itself, strengthening our belief that considering the strength of the global economy, it makes sense to remain well exposed to equities,” Melman said at a media event this week. “We have been tactically shifting between neutral and over-exposed since the beginning of the year. When the US Federal Reserve first lowers its key rates, we will have time to review the economic outlook and reset our main allocation decisions,” he added.

“The prospect of monetary easing, starting from decent levels, suggests that the Federal Reserve will manage the slowdown effectively and avoid a recession,” he continued. He expects the first Fed rate cut in September.

Melman highlighted how the economic environment is more favourable than anticipated for capital markets, partly as labour shortages in the US have begun to ease, supported by a substantial influx of immigrants. Disinflation also remains steady and interest rate cuts have started in Switzerland, Canada and Europe and should be initiated in the US.

While the firm believes that President Biden’s re-election in November would have no major impact on capital markets, Melman said that if Donald Trump does win the US elections in November, he is likely to increase import taxes and deport 11 million illegal immigrants, which could create new tensions in the US labour market and cause inflationary pressure. Trump would also have a fiscal policy that would not lower, but rather increase the country’s substantial public deficit. This would be negative for long-duration sovereign bonds, he said. Melman noted that it is difficult to estimate the impact on equities.

Small caps
Although Edmond de Rothschild AM has chosen not to be overweight in European assets, pending clarification of the new French political landscape after the snap elections on 7 July, Melman is optimistic about European small caps. “Valuations have never been more attractive, given the brighter economic environment and the monetary easing that has already been initiated,” he added.

Melman highlighted how small caps have underperformed over the past three to four years, but said that now is a great time for the asset class, with many niche players in the market. The firm also said that it is positive about small caps globally. It has a preference for big data and healthcare too, saying that they are robust structural themes.

Other investment managers are also optimistic about small-mid caps in 2024. Phillip Best and Marc Saint John Webb at Quaero Capital, a specialist fund manager, recently highlighted how small-mid cap equities across Europe and the UK have been overlooked over the past six years, but the tide is starting to change. “We’ve seen some of the worst outflows since the financial crisis,” Best, founding partner of Quaero Capital, said. “Small caps were out of favour as an asset class but the tide is starting to change. We’ve seen better results in our fund in the first quarter of this year, outperforming the index, and we believe that the outlook is good.” See more commentary here. 

Fixed income
Melman is positive about emerging market equities and bonds. The firm remains reasonably well invested across bond markets, with a preference for European high yield corporate debt and high-quality credit. It prefers carry strategies and hybrid debt (corporate and financial),  consequently it plans to raise exposure to emerging debt once the US Federal Reserve pivot signal is strong enough. It is, nevertheless, considering lowering its exposure to long maturities.