Investors are too optimistic about the second half of the year, warn Natixis strategists

This year’s rally could be brought to a halt by politics, especially the US election

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Investors are feeling positive after a strong first half of the year, but Natixis strategists warn that markets are overly optimistic as they head into the latter half of 2024.

They said politics is the key concern that could derail the strong returns made by indices in the first sixth months of the year – namely the US election.

Most of the 30 Natixis strategists surveyed (77%) said elections typically do not have an impact on markets, but this one could be an exception, with most saying that it could put investors at medium (37%) or high risk (37%).

Unlike past election years, most strategists (60%) said the US election is likely to weigh on markets rather than support them.

And these responses were made before Joe Biden stepped out of the race – uncertainty is likely to be even more heightened now that Kamala Harris is in the running against Trump, according to Dave Goodsell, executive director of the Natixis Center for Investor Insight.

“Politics is a springboard into what could disrupt a half-year outlook marked by a positive macroeconomic forecast and clear projections for markets and asset classes,” he said.

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Politics aside, strategists at Natixis highlighted slowing consumer spending (47%), a surprise bought of inflation (40%), and valuations (37%) as three other key concerns that could bring this year’s rally to an end.

Yet politics remained as the top priority. Analysts at other firms, such as at Principal Asset Management’s chief global strategist Seema Shah, also emphasized the importance of this year’s US election, calling it “one of the most contentious in history”.

The headwinds triggered by Trump versus Harris may appear short-lived as the election plays out, but Shah pointed out that the effects of either winner will continue to have an impact well after voting day.

“Taxes, trade, and geopolitical policy can all impact specific industries and the global economy,” she said. “This election season, investors should pay attention to proposals about US trade, geopolitics, and fiscal deficit management, which may influence market volatility.”

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While investors would benefit from lowering their expectations as they enter the second half of 2024, Natixis’ head of global strategy Mabrouk Chetouane said there are actions they can take to shield their portfolios against political uncertainty.

“Investors should be cautiously optimistic as they continue to face an array of headwinds in the second half of the year, led by politics, geopolitical tensions, potentially higher for longer rates, slower consumer spending, and elevated levels of government debt,” he said.

“In order to mitigate risks, investors should look to diversify portfolios across bonds, equities, and alternative investments to prevent over exposure to a single asset class. The broader risks have put more of a focus on quality when it comes to fixed income, with strategists favouring government and investment grade corporates over riskier high-yield and emerging market securities.

“From here, all eyes will be on the US as we wait to find out the outcome of the presidential race, which may have wide knock-on effects to policy, markets, and geopolitics.”