The first half of 2024 wasn’t without its surprises.
The year started off strong, fuelled by the backdrop of strong global gross domestic product (GDP) growth. This was largely due to the resiliency and strength of the U.S. economy, which surprised to the upside despite a backdrop of higher interest rates.
Factors contributing to U.S. strength included the government’s “big fiscal” policy and unparalleled productivity gains.
Closer to home, in Canada we experienced a slowing economy as the more interest-sensitive economy continued to digest restrictive monetary policy conditions.
Likely concerned by this outlook, and to boost growth, the Bank of Canada (BoC) began its easing cycle on June 5, trimming the overnight rate by 25 basis points to 4.75%.
In its recently released 2024 Mid-Year Market Outlook, Mackenzie Investments predicted that rate cuts would likely continue in the second half of 2024 and that the difference in economic growth rates between the U.S. and Canada could mean the BoC cuts more aggressively than the U.S. Federal Reserve in the months ahead.
While persistent inflation and rising bond yields have caused headaches in the Canadian economy, equities have remained resilient as the market looks toward the implications of earnings and a positive economic outlook. Mackenzie expects global GDP growth to continue to hold, offering support for earnings growth and an overall positive tailwind for equities and other risk assets.
In the report, three significant themes were highlighted for consideration in investment portfolios for the second half of this year.
Fixed-income opportunities
Bond yields have been on an upward trajectory this year, as investors reduce expectations of future interest rate cuts by central bankers. But, even as financial conditions tightened, corporate credit spreads narrowed, reflecting not only good investor demand for credit but also strong corporate fundamentals.
As a result, advisors and investors can look to the corporate bond market to find some of the best yield opportunities at two- to 10-year maturities.
Additionally, as the need for energy transition financing grows, more sustainable debt options, including green bonds, are becoming available. In fact, global issuance of green bonds hit a record in the first quarter, and the trend continued into Q2.
Energy transition in transition
Economic growth, resource scarcity and climate change are spurring increased investment in cleaner energy, which surpassed investment in fossil fuels in 2023.
This “great energy transition” will have an important impact on the markets and continue to present opportunities across asset classes and sectors. Investment in energy efficiency technologies, transportation, water and agriculture will remain compelling for investors. Building sustainable infrastructure and capital goods will also support demand for resources such as copper, nickel, catalytic metals and lithium as construction and production tries to keep pace with an increasingly electrified economy.
Additionally, advisors and investors should take note of the intersection between the transition economy and the artificial intelligence (AI) revolution, which is poised to strain an already overburdened global electricity system. Generative AI searches consume more than ten times the energy of traditional search methods, highlighting the associated risks of decades of underinvestment in power infrastructure.
Transformative innovation
Investors recognize the transformative potential of AI, and particularly generative AI, by continuing to pursue investments in the stock market’s established technology giants such as Nvidia and Microsoft.
Generative AI’s mass adoption and seemingly endless use cases will usher in a step change in productivity that has the potential to revolutionize our daily lives. Investors should not overlook the opportunities in other areas, including software, hardware, services and enabler industries that underpin AI’s transformative journey.
Despite the possibilities, history is full of winners and losers when it comes to disruptive technology, which is why investors must assess opportunities carefully and strategize effectively to take advantage of this disruptive technology’s growth potential. The goal should be to create enduring value within an investment portfolio while participating in one of the most extraordinary growth opportunities of our generation.
In what has been a fairly concentrated market environment, with narrow market breadth, advisors should proactively help their clients maintain diversified portfolios that are resilient through various market conditions. Including investable opportunities in our key themes of corporate bonds and sustainable debt options, the energy transition and the transformative potential of AI should help investors capitalize on some of the investment trends that are expected to drive investment returns in the second half of 2024.
Lesley Marks is chief investment officer of equities with Mackenzie Investments.