Monthly House Views - Rate cuts are coming - May 2024

Central banks are now set to pivot but will probably be out of sync. The European Central Bank (ECB) could be the first to cut rates at its June meeting, followed by the Bank of England. Inflation continues to fall in Europe and the modest revival in the economy is unlikely to derail this trend. In the United States, inflation has ticked upwards in some components (mainly housing), but recent signs that the economy is finally starting to moderate could be enough for the Fed to follow suit and cut rates, probably starting in the second half of the year, and gradually normalise its policy stance.
 
We remain Overweight equities in developed economies and have added exposure to emerging markets. Strong economic data and further evidence of upcoming rate cuts persuaded us to maintain our equity Overweight. We remain Overweight European markets, which still look cheap, and US markets, which stand to gain from their strong economy. We nudged up exposure to emerging market equities to cash in on the positive momentum that has emerged over recent weeks in markets that are still (broadly speaking) trading on attractive multiples.
 
We also continue to favour sovereign and investment grade corporate debt, still posting an interesting carry and offering a sound diversification play in case markets are hit by further turbulence in a deeply unstable geopolitical world. We are remaining Overweight the dollar versus the major European currencies to play a likely time-lag in the rate-cutting cycles of the central banks.

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