Global Markets View: Slowing, but growing
Jonel Matthee-Ferreira, CEO of Cogence
Insights from the recent Cogence Summit held in Johannesburg suggest that while there are still uncertainties, the broader global backdrop for equities and fixed income is positive – it’s a good time to invest for the long term.
Navigating the US macro landscape
At the recent Cogence Summit in Johannesburg, we discussed the limitations of viewing the US economy through the traditional ‘hard‑ versus soft‑landing’ narrative. If we frame the current market performance solely through the lens of the COVID-19 pandemic-induced economic shutdown and the end of an era of super-low interest rates, we oversimplify the broader picture.
During the pandemic, economies across the globe shut down as governments responded to a humanitarian crisis, but this was not a cyclical recession. Looking back at the picture of strong growth in the US over the last few years, how can we define the recovery as a soft or hard landing, if we never took off from a recession in the first place?
A central theme for markets has been inflation as a key driver of the hard‑ versus soft‑landing narrative. After reaching levels above 9% in 2022 – the highest in decades – US inflation is now below 3%, although core services inflation is still sticky. The shift is a big deal. However, it has coincided with a cooling in the US economy, most notably in the labour market, leading some market commentators to speculate about an impending recession.
Yet these changes are not signs of an impending recession. They reflect a normalisation from a period of unusually strong growth. The US economy is currently in a ‘Goldilocks zone’ – it’s not too hot, not too cold. It’s a good time to invest.
Navigating US markets
We remain overweight US equities as we lean into the AI theme but have reduced our exposure. Developed market equities have continued to move higher, with the US hitting all-time highs. Also, a combination of upside surprises on US growth and labour data and higher inflation expectations have driven US yields notably higher. Following these moves, we took some profit in our positions ahead of the volatile period around the US election.
As we peer through the near-term uncertainty, the bigger picture is that the fundamentals in the US look good.
One of the themes at the Cogence Summit was the broader effect of artificial intelligence (AI) beyond the information technology sector, creating new opportunities. In 2023, the ‘Magnificent 7’ tech companies like Google and Nvidia largely drove the S&P 500’s 12% earnings growth (USD). Looking ahead, we see the potential for earnings growth broadening to sectors such as healthcare and utilities. For instance, an AI search burns 10 times more electricity than a regular internet search.
So as AI becomes more widely used, this implies more demand, more upgrades of the grid and more spending, which will be supportive for utilities as they play catch-up to the broader equity market.
We also see attractive opportunities across all levels of the AI tech stack: from the infrastructure at the base to data models in the mid-tier and customer-facing tools at the top. So far, much of the boom in the market has been in the customer-facing segment, but we expect a wider set of opportunities in the months ahead. As a point of interest, our analysis shows that AI remains underweight in portfolios across Europe, the Middle East and Africa (EMEA) largely due to home biases in investing. This suggests room to increase exposure to AI in these regions.
Overall, while we maintain a positive view on US equities, we are increasingly optimistic about opportunities beyond technology stocks as the broader market story evolves. We also look to gold as an attractive diversifier and hedge amid increasing geopolitical risk.
Global opportunities abound
In Europe, a cyclical framework gives better insights into the macroeconomic picture. The region is showing signs of an early-cycle weakening trend, largely driven by a decline in the manufacturing sector, which we expect to continue. Nonetheless, we are slightly overweight on European equities, as the region becomes more investable as it exits a long-run earnings slump. Within developed equity, however, we prefer US equity, where strong AI-driven growth has boosted performance.
On fixed income, we are also overweight on European corporate bonds, which we view as attractive. We are confident that the European Central Bank will continue cutting interest rates more aggressively than the US Federal Reserve. As a result, we view European credit as more attractive on a relative basis than US credit.
Within global government bonds, we reduced our exposure to US Treasuries and in turn redeployed this into UK gilts. We see relative monetary policy trends as mispriced for the next 12 to 18 months, with too many cuts priced in for the US but too few cuts priced in for the UK. We also see the thrust of fiscal policy as likely to be somewhat tighter in the UK than in the US for 2025 and beyond.
A point often overlooked by investors is that yields above 4% in parts of the fixed income market were virtually non-existent outside of emerging markets over the past decade. One would have to look back to the early 2000s to find a comparable period with this number of global bonds yielding above 4%. The fixed income landscape has shifted significantly, creating exciting opportunities to secure bond yields without taking on too much risk.
Beyond developed markets, selective investment opportunities exist in emerging markets like South Africa, India and China. However, we recommend a focused, active approach for these regions to capitalise on opportunities.
The bottom line: It’s a positive environment for investing, underpinned by solid earnings and fundamentals. Despite the negative headlines, we’re still confident, focusing on long-term potential while navigating short-term risks with conviction.
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