As we move through the second half of 2024, investors face a landscape characterized by volatility and uncertainty. While the turmoil surrounding the Yen carry trade may have subsided, other risks remain.
These risks, if realized, could disrupt markets and shift investment strategies. Analysts at Macquarie have identified three key risks that investors should closely monitor: the US elections, China's economic performance, and the valuation of growth and tech equities.
The upcoming US elections stand out as the most critical risk factor. Given the global importance of the US economy, any instability surrounding the election could have widespread consequences.
The worst-case scenario would be an inconclusive or bitterly contested result, leading to prolonged uncertainty and heightened market volatility. A political sweep, where either the Democrats or Republicans gain control of both houses and the presidency, could also lead to significant market disruption.
A Democratic sweep might result in larger primary deficits, potentially exceeding 3-3.5%, while a Republican sweep could challenge US institutional pillars. In contrast, a divided government, where control is split between parties, is seen as the most favorable outcome, as it would likely prevent extreme policy measures and reduce volatility.
However, the election campaigns are fluid, and the likelihood of this outcome could change rapidly, especially as debates progress and voter sentiment shifts.
China's economic health is another crucial factor for global markets. While the current consensus assumes a weak but not deeply deflationary economy, China's history of sudden policy shifts, like the unexpected COVID reopening in October 2022, suggests that the country is still capable of rapid changes that could catch markets off guard.
Any further deterioration in China's economic performance could have significant implications, particularly for global supply chains and commodity prices. The robustness of China’s policymakers in responding to economic challenges will be critical.
Should the government opt for aggressive stimulus measures or other unexpected policy pivots, markets could experience increased volatility.
The third risk revolves around the valuation of growth and tech equities, sectors that have seen substantial investment driven by enthusiasm for artificial intelligence (AI) and other innovations.
“At this stage, we maintain that growth styles are not yet in the “bubble territory” while EPS growth rates remain robust (~17% in 2Q'24), ROEs are at a double of the underlying indices (~33% for SPX) and FCF remains strong,” said analysts at Macquarie.
“Over the last several months, investors have become concerned that the perceived AI overinvestment might deflate what are currently high valuations,” the analysts said. Any unexpected deceleration in earnings growth could trigger a sell-off in high-growth sectors and broader market rotations, leading to increased volatility.