The easiest part of 2024 is over

Federated Hermes, one of the world's largest fund managers with $670bn in AUM, foresees a more complex scenario heading into the second half of 2024.

Lewis Grant, Senior Portfolio Manager for Global Equities at Federated Hermes Limited, takes stock of the end of the first quarter and indicates that the upcoming Fed meetings and the expected interest rate cut increase uncertainty and will make the global economic scenario more challenging. In this context, Lewis highlights the difference in expectations between bond and equity markets.

Markets were generally buoyant as a strong quarter for equities pulls to a close. There was a late reversal of the darling mega cap techs that have driven much of the rally as they were stung by rebalances from large institutions. The easy part of 2024 is now over and what comes is set to be more challenging. With two Federal Reserve meetings, and one interest rate cut set for the next quarter, there is a lot of uncertainty ahead. We are seeing contrasting expectations between the more excited equity markets and the typically stoic fixed income markets. Equities look set to price in up to three rate cuts this year, whilst the yield curve, if one is being generous, is pricing in two rate cuts. The semantics of three versus two are not as important as the timing of these cuts and this is the big risk for equities now. If inflation reads trend down we expect a cut in June, but if it continues to be sticky there will be a correction in equities. 

Many commentators suggest the upside of interest rate cuts has been priced in, but we view that as true only in the mega cap space. We anticipate a wider set of beneficiaries in a market broadening as the macro environment loosens and financing becomes cheaper.

Lewis Grant, Senior Portfolio Manager for Global Equities at Federated Hermes Limited

Mark Sherlock, Head of US Equities at Federated Hermes Limited, highlights the opportunities in US small- and mid-caps and notes that their valuations "look historically cheap compared to large-caps.

It might not have been the best headlines for small-cap performance in the US relative to their large cap counterparts, but we undoubtedly think the outlook for certain pockets of the SMID market is far more positive. The relative narrowness of US equity market performance over the last couple of years - driven by a combination of investors’ focus on AI-related opportunities  and concerns over the strength of the US economy - has created what we believe to be a great entry point into small and mid-cap companies. On a relative basis, SMID-cap valuations look historically cheap relative to large cap, particularly in the light of a robust US domestic economy (to which small and mid-cap companies are primarily oriented). As consensus moves towards a more benign view of the underlying economy, we expect a broader set of companies to benefit and market leadership within the index to change. 

Mark Sherlock, Head of US Equities at Federated Hermes Limited

Stephen Auth, Chief Investment Officer for Equites at Federated Hermes, explains that Federated Hermes' strategy overweights equities with a focus on global equities, beyond the Magnificent Seven.

The global macro team at Federated Hermes held an all-hands meeting to review its outlook and positioning. A healthy discussion that covered analysis on the gamut of possibilities led to the simplest of conclusions: we’re going to hold where we are and do nothing. We are sticking with our equity overweight call and zeroing in on stocks in the broader market outside the Magnificent Seven. Although aware that a correction could come from some unforeseen event, we’d rather add to equities again if a pullback comes than sell now and hope for one. In bull markets, you buy dips rather than sell rallies. So we’re holding tight.

Stephen Auth, Chief Investment Officer for Equites at Federated Hermes