For investors, the first six months of 2024 were dominated by one question: when will the US Federal Reserve start cutting interest rates? The answer was it didn’t, as it deemed inflation too high.
Now the question is set to linger over the second half of the year, too. This time, markets may get the answer they crave.
Markets expect one and possibly two US rate cuts this year. When they arrive, we will be in a different world.
If you are looking to invest $10,000 over the next six months, here are three top investment trends to consider right now.
The first should fly if we hit peak interest rates, the second will benefit if lower borrowing costs trigger an economic revival, while the third suggests one of the year’s best asset classes has further to run.
As with any investment, consider both the risks and rewards and aim to hold for years, not just six months, to give your choices time to deliver.
Fixed interest
As interest rates stay “higher for longer” than anticipated, cash and bonds are still king.
When rates are finally cut, easy access savings rates will inevitably follow. So will yields on government bonds.
It may, therefore, be wise to lock in today.
Anna Bowes, founder of Savings Champion, says fixed-rate savings bonds are in a strange place right now.
“Normally you’d expect to be rewarded for tying up your cash for longer. That’s no longer the case. Banks don’t want to offer interest rates that will be far above the market price in a year or so,” she adds.
As consumer price growth slows, many fixed-rate savings bonds now offer an inflation-beating return for the first time in years.
“By locking up your money in a fixed-rate savings bond, you can secure an interest rate that is likely to outpace inflation for several years to come,” Ms Bowes says.
In 2021, the yield on a 30-year US government bond, or Treasury, was just 2.04 per cent. Today, it's 4.5 per cent.
Yet, we are now approaching the tipping point, says Vijay Valecha, chief investment officer at Century Financial in Dubai.
“Recent dovish remarks from the Fed, slowing gross domestic product growth and a weakening labour market have increased the probability of a September rate cut from 64 per cent to 73 per cent,” he adds.
Buying US Treasuries today would allow investors to lock into a higher yield. There is a second attraction. When bond yields fall, prices rise, giving bond investors a capital gain, too.
Mr Valecha suggests investing in exchange-traded funds (ETFs) targeting long-duration government bonds such as the iShares 20+ Year Treasury Bond ETF and Vanguard Long Term Treasury Index Fund ETF.
While inflation and interest rates may fall, we can’t expect a return to the era of near-zero rates.
Fund manager BlackRock favours inflation-linked bonds as it sees inflation sticking about the 3 per cent mark.
Those who share that view may be tempted by Treasury inflation-protected securities (TIPS), which are tied to the consumer price index.
The iShares TIPS Bond ETF and Schwab US Tips ETF are popular options.
Smaller companies
Smaller companies tend to be at the mercy of the economic cycle. They typically outperform in a boom but suffer in a downturn.
They have underperformed large caps for years, as higher interest rates drive up the cost of borrowing money to fund growth and inflation discounts the value of their future earnings.
Mr Valecha says they are due for a breakout and this year we might finally see it.
“Small caps are trading at an 18 per cent discount to their fair value, making them highly attractive to investors. Monetary policy easing bodes well as it will allow them to borrow at cheaper rates while increasing the value of future cash flows,” he adds.
Investors will also be willing to take on more risk as the economy heads towards a soft landing, further enhancing their appeal.
Yet the small-cap recovery could take a hit from US political turbulence, warns Jason Hollands, managing director of fund platform Bestinvest by Evelyn Partners.
“If Donald Trump wins November’s US presidential election, this would usher in unfunded tax cuts, higher tariffs, a bigger deficit and higher inflation,” he says.
Economic growth may be higher, but so will borrowing costs.
“This could make life difficult for smaller companies with leveraged balance sheets, so investors need to be super selective if dabbling in small cap stocks,” he warns.
For those willing to balance the risks against the rewards, Mr Valecha highlights the iShares Russell 2000 ETF, Vanguard Small-Cap ETF and WisdomTree Emerging Markets SmallCap Dividend Fund.
Commodities
2024 has been kind to commodities and that may continue in the second half of the year.
Demand for copper is considered a proxy for economic health, as it is used for electricity transmission, construction, electronics, manufacturing and cars.
The price is up almost 20 per cent year to date, in US dollar terms, and could climb higher as global recession fears fade, Mr Hollands says.
“Rate cuts, a recovery in global travel and the drive to net zero should boost demand for a slew of commodities.”
Laith Khalaf, head of investment analysis at AJ Bell, says “hard assets” like commodities are popular as “supply cannot be conjured out of thin air by central bankers or governments, as is the case with money and bonds”.
“Commodities, notably gold and oil, outperformed during the 1970s, a period of lofty inflation and geopolitical tension. They are doing so again,” he adds.
Gold's price is up 12 per cent so far this year to about $2,378 an ounce, Mr Valecha says.
“The rally was fuelled by rate cut expectations, safe haven demand due to geopolitical tensions and continued central bank buying, especially in India and China.”
Gold doesn’t pay income but this will be less of an issue when interest rates start falling and bond yields and savings rates retreat, reducing the opportunity cost of holding the precious metal, he adds.
managing director, Bestinvest by Evelyn Partners
Also, gold is priced in US dollars. Fed rate cuts will weaken the dollar and make gold cheaper for overseas buyers.
“Gold is likely to be in demand as global investors look to hedge bubbling risks amid a complacent equity market and persistent geopolitical tensions,” Mr Valecha says.
He favours the SPDR Gold Shares ETF, which invests in physical gold and returned 20.6 per cent over the last year.
Mr Hollands suggests a broad-based commodity fund such as the BlackRock World Mining Trust.
The Invesco DB Commodity Index Tracking Fund, First Trust Global Tactical Commodity Strategy Fund and iShares S&P GSCI Commodity-Indexed Trust are all popular.
