- Inflation is cooling, but not declining fast enough. Core PCE inflation remains above the Fed's forecasted downward trend. The labor market is tight, with two jobs available for every unemployed person, allowing workers to demand higher wages. Services PMIs are improving, but manufacturing remains in contraction. The Fed skipped a hike in June to assess the effects of aggressive policy tightening, but two more rate hikes are expected starting in July.
- Updated guidance and hawkish stance from US Federal Reserve on interest rates trajectory in the coming quarters will continue to dominate sentiment in equity and fixed income markets.
- Market is expecting an economic slowdown as indicated by the inverted yield curve. The fluctuating job data and business sentiment, along with a manufacturing PMI that still exhibits signs of weakness, add to the prevailing uncertainty.
- Given this uncertain landscape, investors should exercise caution and be highly selective when it comes to sector exposure.
- Each economic cycle possesses both unique and familiar elements. What sets this recession apart from the 2008 global financial crisis is the uneven slowdown observed across different sectors.
- The presence of a resilient consumer base with ample savings, along with the post-global financial crisis recovery cycle, has propelled us into a trajectory of asymmetrical/disparate growth as opposed to broad based participation. Meanwhile, disruptions in the global supply chain caused by the ongoing pandemic over the past two years have accelerated inflationary pressures. This, coupled with Geopolitical uncertainties, have further contributed to inflation, necessitating aggressive rate hikes.
- Economic growth can remain positive yet moderate during late cycles. In this context, investors may consider defensive stocks, particularly large-cap quality stocks, as they can provide downside protection.
- The valuation of the S&P 500 is currently in line with its 10-year average, with a price-to-earnings ratio of around 22x. This represents a 25% drawdown from the peak seen in 2021[1]. It is likely that the markets have already factored in the worst of the negative earnings scenario.
Michelle Cluver, Senior Portfolio Strategist, Global X ETFs said:
Portfolio Positioning: Quality at the Core, Diversified with Themes
The current market uncertainty emphasizes the need for downside protection, which can be achieved by focusing on large-cap quality stocks. Additionally, incorporating thematic exposure in the portfolio can offer long-term diversification benefits and provide flexibility during shifts in the market cycle. Key themes are as below:
- Despite the recent market rally surrounding AI-related equities, it is important to recognize that AI is a long-term theme with significant staying power. Researchers have been diligently working on AI, including generative AI, for several years. For instance, OpenAI has already established itself as a key player in the field over the past seven years.
- While the larger names in the US have dominated the market rally in the past month, there are also opportunities to be found in the broader AI ecosystem. This ecosystem encompasses companies engaged in semiconductors, cloud computing, and cybersecurity, among others, which stand to benefit from the cascading effects of AI advancements.
- Considering the continuous innovation in the AI space, we anticipate a significant growth trajectory. We expect the global AI market to grow at a CAGR of 35.6% to nearly $300 billion in sales by 2026, 10 times its size in 2020[2].
- Automation plays a key role in driving efficiency, growth and transforming production processes. It enables companies to achieve higher productivity levels through increased efficiency, cost reduction, and improved product quality.
- While labor (onshore and offshore) continues to be more expensive over time, robotics costs have declined. This dynamic alongside improving technology is driving the case for adopting automation.
Mobility - Electric Vehicles
- The adoption of EVs is the primary pathway for reducing greenhouse gas emissions throughout the transport sector. EVs are forecast to account for 36% of global vehicle sales in 2030 and 55% in 2035. As the world moves closer to a net-zero economy by mid-century, EVs could make up more than 75% of sales[3].
- The deliveries of electric vehicles have been increasing, with a greater emphasis on pure EVs as opposed to hybrids. The mix of vehicles has shifted from 62% pure EVs in 2016 to 71% in 2021[4].
- The Autonomous Vehicle (AV) market will grow in lockstep with technological advancements. It is forecasted that by 2030, the global market size for AVs could reach approximately 1.8 trillion dollars[5].
- As these technologies gain wider adoption, numerous key segments beyond the vehicle manufacturers are poised to benefit. These encompass electric vehicle components, such as electric drivetrains, batteries, fuel cells, chemicals, and raw materials, along with companies contributing to AV technology, including sensors, mapping technology, AI, and advanced driver assistance systems. Furthermore, ride-share platforms and network-connected services for transportation will also experience positive effects stemming from the growth of the AV market.
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