Underlying resilient private demand, business investment, employment growth, and multiple rate cuts are expected to sustain the expansion of the global business cycle.
Despite significant negativity around inflation, interest rates and the global economy in general, several factors are making global equity markets attractive.
Global macro settings are expected to remain within their ‘back to normal’ levels in 2025. We are forecasting growth, lower inflation and real rate cuts. The structural themes of decarbonisation and slowing globalisation continue to underpin activity.
On economic growth
We are forecasting a resilient US and Europe on a modest recovery. The US growth outlook is driven by a resilient labour market remaining within close range of full employment levels, and underlying strength in the consumer from real wages growth and the drawdown in excess savings. Europe has exited very shallow recessionary conditions and is on a sustained recovery, assisted by further European Central Bank rate cuts. The Asia-Pacific growth engine will continue outpacing the rest of the world. China’s expansionary fiscal stance, monetary easing and latest measures to stabilise the property sector should sustain growth in the mid 4% plus range. Finally, Australia’s Gross Domestic Product (GDP) is expected to rise in the second half of 2024 and move higher through 2025.
Inflation
Inflation is falling, and the forecast trajectory is for a return to above central bank target levels out to 2025, in the US and globally. Core inflation dynamics are switching, and we see persistent sticky services (ex-housing) inflation, lower housing inflation to a lesser degree, and upside risk from goods inflation.
Outlook for rates
The US Federal Reserve is expected to deliver rate cuts in 2024 and into 2025. An ongoing improvement in Australia’s inflation dynamics should provide an opening for the Reserve Bank of Australia to adjust rates in 2025.
Two specific areas we like are listed global essential infrastructure and global small caps, both well placed to benefit from the global macro-economic outlook.
Listed global essential infrastructure
We see this over the next twelve months as being a combination of three things. Firstly, the short-term underperformance relative to global equities has led to what we believe to be a significant valuation upside opportunity.
Secondly, the benefits of recent higher inflation are yet to fully feed through into revenues and cashflow, and with inflation expected to remain above trend for the next few years, this benefit will take several years to be fully realised in higher profits. We do not think that the market fully appreciates this value. As inflation is falling, infrastructure assets are able to retain the upside in revenues while benefiting from cheaper funding in an easing environment.
Finally, the long-term secular growth drivers such as the energy transition and decarbonisation, repowering Europe, mobile phone technology transition from 4G to 5G, and the impacts of AI on the booming demand for electricity have never looked better for the infrastructure players in these spaces.
Global small-caps
Global small-cap equities are still clawing back their relative value position against larger companies following the rapid normalisation of interest rates in 2022 and 2023. In addition to underlying thematics like decarbonisation, upgrading the electrical grid, and artificial intelligence, we see the current easing bias in global rates as an additional tailwind for the sector.
The large fiscal stimulus provided by the US administration is a robust tailwind for US and global growth going forward and is expected to prevent any material recession in the Western economies.
We are expecting significant investment from European governments and utility companies into the European grid upgrade in the coming years. Specific focus areas that we see benefitting from this growth environment include the manufacturing renaissance in the US; onshoring; data centre investment and the evolution of artificial intelligence; and finally, the move to decarbonisation and the associated electrical grid upgrade. These catalysts continue to provide exciting investment opportunities within the global small-cap market.
Summary
This is a positive macro environment and represents good news for global equities. The global economy is on a positive upward trajectory, with lower inflation and real rate cuts. The US Federal Reserve has joined the growing list of central banks in the global rate cutting cycle which has been underway since the June quarter of 2024.
In the US labour market, we highlight the following features. The non-farm payrolls measure on a three-month moving average rate is back at pre-pandemic levels. The ratio of job openings to unemployed persons is back at levels when prior tightening cycles commenced.
The weekly jobless claims measure as a lead employment indicator has a run rate that is well below, and inconsistent with, market fears of a recession triggered by a surging unemployment rate.
In addition to these fundamental measures, financial markets are showing the US 2/10 year bond yield curve back with a normal upward slope from being inverted for the last two years, reflecting a series of cuts in the Fed funds rate. Moreover, non-investment credit spreads have narrowed year to date, the net worth of households has risen by 7.1% on a year ago, on rising equity and housing valuations, and the ratio of total private debt to gross domestic product declined further, approaching its historical average, with both business and household ratios lower.
Consumer debt servicing levels in the US appear manageable and have fallen for those with fixed rate mortgages, with credit growth flowing through to all sectors.
Finally, financial system stability is sound and resilient according to the Federal Reserve’s half yearly report. There is little sign of financial vulnerabilities triggered by valuation pressures, borrowing by businesses and households, financial-sector leverage, or funding risks.
We remain vigilant on unpredictable geopolitical events that may materially impact our view. That said, underlying resilient private demand, business investment, employment growth, and multiple rate cuts are expected to sustain the expansion of the global business cycle.
By Jim Chronis, Chief Economist, Ausbil Investment Management