ClockWise: Investment Clock moving towards commodity friendly Overheat

Global equities started the second quarter on the back foot following a strong first quarter. We remain positive on equities as our Investment Clock remained in the Recovery phase in April (chart 1), with business optimism continuing to pick up against a backdrop of resilient labour market.

Investor sentiment has also shifted back to more neutral territory, retreating from euphoric levels reached in March around the Nvidia earnings, which further supports the bullish view.

However, while our Investment Clock does remain in Recovery, we acknowledge that the latest reading of the Clock has taken a step towards the commodity friendly Overheat phase, as increasing geopolitical risk has seen oil prices rising again.

Chart 1: Investment Clock remains in Recovery phase but moved towards Overheat

Source: RLAM. For illustrative purposes only. Trail shows monthly readings based on global growth and inflation indicators

We have become more positive on commodities over recent weeks. Our nominal growth indicator, which combines the inflation and growth indicators used in our Investment Clock, has continued to improve (chart 2). This suggests that the strength in commodities is also supported by improvements in the global growth outlook, in addition to geopolitical risk.

We are also slightly more negative on bonds. While we are still expecting the US Federal Reserve, the Bank of England and the European Central Bank to cut interest rates later this year, they remain data dependent. It is plausible that these central banks end up holding rates at current levels for longer or cutting them by less than anticipated by bond investors.

We have not entered into Overheat yet, but this phase is typically associated with rate hikes and not rate cuts. Like central banks, we remain data dependent and monitor developments of the business cycle and other fundamentals.

Chart 2: RLAM Global Nominal Growth Scorecard as a 3M lead for Commodities vs Bonds

Source: LSEG Datastream as at 08/04/2024

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