In the second half of 2024, investors face an environment characterized by volatility and uncertainty. Although the turbulence surrounding the yen carry trade may have subsided, other risks remain.
If these risks materialize, they could disrupt markets and change investment strategies. Macquarie analysts have identified three main risks that investors should closely monitor: the US election, China’s economic performance and the valuation of growth and technology stocks.
The biggest risk factor is the upcoming US elections. Given the global importance of the US economy, any instability related to the elections could have far-reaching consequences.
The worst-case scenario would be an inconclusive or closely contested outcome, leading to continued uncertainty and increased market volatility. A political breakthrough in which either the Democrats or Republicans gain control of both houses and the presidency could also cause significant market disruption.
A Democratic victory could lead to higher primary deficits, possibly exceeding 3-3.5%, while a Republican victory could challenge the institutional pillars of the U.S. A divided government, with control split between the parties, on the other hand, is seen as the most favorable outcome, as it would likely prevent extreme policy measures and reduce volatility.
However, the election campaign is in flux and the likelihood of this outcome could change rapidly, particularly as the debates progress and voter sentiment changes.
China’s economic health is another crucial factor for global markets. While the current consensus is for a weak but not deeply deflationary economy, China’s history of sudden policy changes, such as the unexpected post-COVID reopening in October 2022, suggests the country is still capable of rapid change that could surprise markets.
Any further deterioration in China’s economic performance could have significant consequences, particularly for global supply chains and commodity prices. The decisive factor will be how robustly China’s policymakers respond to the economic challenges.
If the government decides to implement aggressive stimulus measures or other unexpected policy changes, the markets could experience increased volatility.
The third risk concerns the valuation of growth and technology stocks. These sectors have seen a lot of investment due to the enthusiasm for artificial intelligence (AI) and other innovations.
“At this point, we maintain that growth styles are not yet in ‘bubble territory’ while EPS growth rates remain robust (~17% in Q2 2024), returns on equity (ROEs) are double the underlying indices (~33% for SPX) and FCF remains strong,” said analysts at Macquarie.
“In recent months, investors have become increasingly fearful that perceived overinvestment in AI could devalue currently high valuations,” the analysts said. Any unexpected slowdown in earnings growth could trigger a sell-off in high-growth sectors and broader market rotations, leading to increased volatility.
