As monetary policy eases globally, a much more supportive and conducive environment is emerging for global small caps and emerging markets, according to Zenith Investment Partners co-founder and investment director, David Wright.

“The valuations of global small caps have been pretty attractive for a period of time. On the sentiment side, certainly price momentum and rising risk appetite is apparent and that's a positive. We're taking some overweight positions in both of those asset classes,” he says.

US soft landing

While it looks like the US has mostly achieved a soft landing, Zenith’s head of asset allocation, Damien Hennessy, pointed out that soft landings are actually quite rare.

“We've had a soft landing as our base case for probably the past 12 to 15 months and it seems to be unfolding,” he said.

“There are certainly risks around that, and we've highlighted those - a recession as a 20 per cent likelihood and a 15 per cent probability attached to the higher for longer, or the strong growth, sticky inflation scenario,” Mr Hennessy said.

“Markets have been going for a very aggressive rate cutting cycle in the US but as we've seen in the last few weeks, markets are just starting to have another look at that and wonder if the economy is not slowing that much – that maybe it doesn't need a lot of rate cuts. That's been our view for a while.”

As well as global small caps and emerging markets, Mr Wright says quality companies are also likely to do well in a soft-landing scenario.

“Just as a reminder, quality is represented in equities through aspects such as strong balance sheets, stable earnings, growing earnings and low levels of debt.  With parts of equity markets being expensive, you really want to focus on those types of companies, should we have a pullback, and those that will continue to perform well in the soft-landing scenario,” Mr Wright said.
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With the US election imminent, Zenith believes the most likely outcome is either Trump as president with split Congress or a Harris presidency with split Congress.

“Trump has gained a bit of momentum in a number of polls and either totally removed the lead that Harris had, or at least has it neck and neck,” Hennessy said.

“A Trump presidency with a split Congress would probably see bond yields peak, equities improve, and the USD rise slightly, while a Harris presidency would still have equities improving but bond yields lower and the USD lower.

“There's also been talk of a Republican clean sweep. Under that scenario, markets would focus on the policy mix including higher tariffs, extended tax cuts, ongoing fiscal spending, and perhaps cuts to immigration.

“Those three or four policy planks are generally seen as inflationary, so the market is beginning to price this in as a possibility,” Hennessy said.

“And although the election is just 24 hours away, the result may not be known for a little while after that.”

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