Pinebridge Investments, a private, global asset manager focused on active, high-conviction investing, discusses the midyear outlook for fixed income and equities in 2024, outlining key themes to watch and asset allocation.

Experts at Pinebridge Investments think the remainder of 2024 is an ideal time to tap opportunities in firms that may look less promising in the short term but benefit from structural tailwinds, including advances in artificial intelligence, net zero and green energy spending, electric vehicles (EV), treatments for cancer, rare diseases, obesity, and diabetes, such as GLP-1 agonist drugs.

Overly negative short-term sentiment could create opportunities in quality companies that have strong business models and solid prospects for future growth.

This is the view of Rob Hinchliffe, portfolio manager, head of global sector cluster research, Kenneth Ruskin, director of research and head of sustainable investing – global equities, and Michael Mark, research analyst at PineBridge Investments, in their midyear equity outlook for 2024.

They highlighted how many Covid-era trends are now resolving: consumers have largely spent down their savings, industry backlogs and supply issues are clearing, and pricing has begun to soften. “But this “new normalisation” does not mark a return to the old status quo, with ongoing innovations and the nearshoring trend having permanently altered the landscape,” they said in a note.

Their 2024 outlook for AI-related semiconductor and hardware spending has become more optimistic following first-quarter earnings results, driven by raised capex forecasts from hyperscale companies and rising demand from enterprise and government verticals.

China
They also emphasised how China is moving full steam ahead on the production of vehicles and batteries. “Companies globally that provide connectivity for EVs, especially in Korea, are also doing well due to their exposure to the Chinese market,” they said. “The market has become concerned about EV penetration slowing as automakers in Europe and the US pull back on ambitious plans. However, this has affected sentiment more than reality, as Asia remains the dominant EV market and developed market EV penetration is still growing, just not as ambitiously as planned.” This is also the view of other investment managers, after the European Commission decided to bump up tariffs on electric vehicle imports from China, following the US’s move to increase tariffs.

Maggie Sun, senior portfolio manager at Sumitomo Mitsui DS Asset Management (SMDAM), thinks the overall impact to Chinese EV makers is quite manageable as the anti-subsidy investigation started in September 2023 and a majority of the headwind impact is already priced in the share price. Dina Ting, head of global index portfolio management at Franklin Templeton, also believes that over the long term, it seems unlikely that the EU tariffs will halt China’s market share claims in Europe. See more commentary here. 

Fixed income
For the second half of 2024, Steven Oh, global head of credit and fixed income, co-head of leveraged finance, at PineBridge Investments, thinks investors should not assume a hyper-defensive stance, despite the seemingly high valuations: rather, they should maintain the barbelled approach he had advocated at the start of the year that combined more defensive, lower-risk Treasury Bill positions on one end while assuming calculated, much higher-yielding, higher-risk assets at the other. There should also be an increased focus on diversifying risks on the one hand while looking beyond cash on the other.

Such diversification extends to potential geographic benefits in assets such as emerging market corporate credit, rather than an argument for excess yield pickup, Oh said.

“Looking at specific areas of opportunity, leveraged loan yields are still in the 9 per cent to 10 per cent range, which is attractive on a risk-adjusted basis,” he said. In colaterallised loan obligations (CLOs), given tighter valuations and risks that are tilted to the downside, he favours positioning higher in the capital stack overall and taking advantage of new issue yield premiums to secondary spreads.

In high yield, while the cash conversion cycle (CCC)-and-below segment shows elevated spreads, many issuers are facing idiosyncratic issues, and Oh thinks now is not the time to be overweight that segment. From a geographic standpoint, Asia’s high yield market continues to offer an attractive spread advantage despite some compression. Oh sees attractive opportunities in emerging market corporates, particularly in areas of the Asia fixed income markets, as a means of diversifying risk.

For investment grade, longer-end credit spreads are trading at ultra-tight levels, whereas Oh thinks intermediate credit still offers reasonable compensation.

Oh highlighted how mortgage-backed securities (MBS) remain relatively cheap versus corporates, but the technical factors behind this outcome are not necessarily going to reverse in the near term.

However, while he sees relative value in the areas above, he believes that most fixed income risk assets offer limited excess return opportunities, despite attractive yields. For this reason, Oh encourages a focus on careful bottom-up issuer selection and risk management to opportunistically tap into the most compelling assets as they emerge in the second half of 2024.