Investing in the second half of 2024

Friday Investors' Club podcast: Rightsizing AI exposure (9:49)
Do record AI market caps point to a bubble? CIO's Sundeep Gantori, Jon Gordon, and Wayne Gordon dig into it.

UBS video - Road to the Election: Implications for the EU (10:22)
CIO economist Dean Turner on how the US election may impact EU trade, defense, and growth.

It’s proving to be an eventful end to the first half of 2024. The S&P 500 has now advanced more than 15% since the start of the year, fueled by enthusiasm over AI, with chipmaker NVIDIA this week competing with Microsoft for the title of the world’s largest publicly listed company. And rate-cutting is in full swing. Switzerland, which kicked off the easing cycle in March, surprised markets again with its second rate cut on Thursday.

From a political perspective, investors should brace for further drama next week to wrap up the first half of 2024. French voters go to the polls on 30 June in a snap election, with parties on the right and the left aiming to unseat President Emmanuel Macron’s centrist alliance. Meanwhile, in the US, President Joe Biden and his rival, former President Donald Trump, engage in their first televised debate on 27 June, an encounter that could shape public perceptions.

We expect the same themes to shape markets in the second half of the year. With this in mind, we recommend several core strategies for investors:

Prepare for lower interest rates. Monetary easing is already well under way, with cuts from the Swiss National Bank, Sweden’s Riksbank, the Bank of Canada, and the European Central Bank. The key for markets, however, will be the timing and pace of cuts from the Federal Reserve. In our view, the Fed is still on track to ease by 50 basis points this year, most likely starting at the September meeting. Next week’s release of the personal consumption expenditure (PCE) index, the central bank’s favorite measure of inflation, should add to evidence that price pressures are fading.

Against this backdrop, investors need to brace for progressively lower returns from cash. Bond ladders can help meet expected cash requirements over the next one to three years, and we continue to see attractive yields on quality bonds.

Seize the AI investment opportunity. AI looks likely to be one of the largest investment opportunities in history, and investors need to ensure their portfolios are “AI enabled.” We like the semiconductor companies that are benefiting from high rates of AI investment, and the vertically integrated mega-caps that are well positioned across the AI value chain. That said, as the second half evolves, there is a risk that fears about over-investment could lead to a correction. Capital preservation strategies can help investors mitigate this risk.

Prepare portfolios for the US election. As the US election gets closer, it’s important to remember the principle that investors should vote at the ballot box, and not with their portfolios. But the election is likely to trigger market volatility, and we think investors should manage risks accordingly. In equities, the US consumer discretionary and renewables sectors could be vulnerable in a scenario of a Republican sweep of both the White House and Congress. At the same time, we think financials would stand to benefit in that scenario.

We also think gold can be an effective hedge against concerns about geopolitics, inflation, or the high US budget deficit.

So, the second half of 2024 is shaping up to be a time of transition and volatility. The decisions that investors make now will be key to navigating this period effectively. We recommend a balanced approach, diversified across bonds, equities, and alternatives, to position for long-term financial goals while navigating near-term uncertainty.

Read more in our latest Monthly Letter, “Decision time” and our 2H outlook (published 20 June 2024).