(News Bulletin 247) – In a context of geopolitical uncertainty, how should investors manage their portfolios to best approach this second half of 2024? Lombard Odier gives us some food for thought.

After a better-than-expected first half on the macroeconomic front, several geopolitical challenges will present themselves to investors in the second half of the year. All of these factors will cause episodes of volatility, warns asset manager Lombard Odier.

In this upcoming context, which will be marked by the American elections and geopolitical competition, how can we navigate these troubled waters? Nannette Hechler-Fayd’herbe, Head of Investment Strategy, Sustainability and Research at Lombard Odier, gives her ideas to enlighten investors at the dawn of this second half of the year.

This semester will be complex to approach, warns the specialist and according to her, investors who will adopt an active approach aimed at “balancing risks and new investment opportunities” will be rewarded.

Cyclicals, regions and sectors lagging behind

Among her investment views, Nannette Hechler-Fayd’herbe sees bullish potential in equity markets, as she believes the asset class should benefit from solid earnings growth and rate cuts in the second half of 2024.

Especially since stocks “show a higher upside potential than bonds over the next half-year.” But the specialist is keen to warn that the level of concentration of stocks on the American market, and an increase in geopolitical risks could generate volatility in the short term.

Lombard Odier is ready to seize opportunities that may arise in certain cyclical sectors, such as energy, materials, consumer discretionary and communication services.

The fund manager also says it has its sights set on regions and sectors that are “reasonably valued” and have “lagged” overall equity performance to date. Among the geographies that tick these boxes, Hechler-Fayd’herbe cites emerging markets, which she says “can also offer growth exposure at a reasonable price.” She favors Taiwan, South Korea and India.

“The eurozone, which has recently suffered from political uncertainties caused by the European elections, is expected to lag global indices due to weaker earnings prospects,” she notes.

The specialist also favours a thematic approach, which she believes is suited to “investors looking to strengthen the resilience of their portfolios and exploit long-term growth drivers”. This approach draws on ongoing transformations in the areas of environmental transition, demographics, infrastructure and technology that can improve portfolio resilience across cycles.

A strong dollar

On the currency front, Lombard Odier is betting on continued strength of the US dollar, which “continues to benefit from an advantage over other G10 currencies and relatively weaker growth outside the United States.” This situation is expected to continue in the second half of the year, according to the management company.

“However, political and budgetary risks in the United States, the overvaluation of the dollar, the gradual rise of gold to the detriment of the dollar in central bank reserves and a “multipolar” world cast some doubt on the long-term sustainability of the dollar’s strength,” warns Lombard Odier.

Nevertheless, the management company believes that the greenback should continue to appreciate against the euro and the pound sterling in the second half of the year, as the strength of US growth, the acceleration of the rate cut cycle in Europe and the cost of carry will continue to give an advantage to the American currency, which also acts as a source of diversification in portfolios.

On the single currency side, the management company is less enthusiastic. It expects the euro to continue to lose ground against the Swiss franc, “although short-term consolidation remains possible as interest rate spreads narrow and geopolitical risks stimulate demand for other safe-haven assets.”

Raw materials in force

The optimism of the Lombard Odier specialist also targets raw materials, the prices of which could, according to the management company, “record solid gains in the future”.

“In a context of geopolitical uncertainty, safe and reliable access to natural resources is imperative, especially since the exploitation of these resources will be more important in the context of the transition to a net-zero economy,” she notes.

Nannette Hechler-Fayd’herbe says she anticipates lasting changes in commodity markets. Industrial metals, particularly copper, are facing new structural demand linked to electrification and the expansion of data centers required by the rise of artificial intelligence, she says.

Alternative building and packaging materials, such as wood, are also expected to see growing demand, Lombard Odier said, as rising carbon prices and the expansion of carbon trading markets now allow natural resources to be more fairly valued.

As for gold, the ultimate safe haven, its price should remain at a sustained level, “despite the resilience of the dollar” says the expert. She recalls the negative correlation between these two assets which often move in opposite directions.

The lower the dollar, the cheaper it is for investors whose reference currency is not the dollar to buy gold. In short, a fall in the dollar supports gold (like most commodities) all other things being equal.

The precious metal also tends to shine in a geopolitical and financial environment, and presents itself as an important reserve asset for central banks, Lombard Odier also recalls.

In 2023, central banks bought 1,037 tonnes of gold – the second-highest buying spree in history – after a record 1,082 tonnes in 2022, according to gold.org/goldhub/data/2024-central-bank-gold-reserves-survey”>the World Gold Council. Following these record figures, gold continues to be viewed favorably by central banks as a reserve asset.

According to the 2024 Central Bank Gold Reserves (CBGR) survey, conducted by the same organization between February 19 and April 30, 2024, 29% of central banks surveyed said they wanted to increase their gold reserves over the next twelve months, which is the highest level since the survey began in 2018.

“A resurgence of risk aversion could weigh on commodity prices, but we would then take advantage of their weakness to (re)build our exposure to industrial metals,” Lombard Odier points out.