Equity portfolio manager Caroline Randall , based in London , and fixed-income portfolio manager David Hoag , based in the firm ’ s Los Angeles headquarters , presented their midyear outlook in June , weighing in on inflation , interest rates and new investment trends .

Randall noted that many of the S & P 500 ’ s gains have come from a narrow range of companies , and that when stocks are weighted equally the index is up just 3 %. She said that this presents an opportunity for investors to seek out the laggard stocks , which will benefit from such trends as

increased consumption from people living longer , as well as healthcare innovations and the energy transition .

“ These laggards tend to be exposed to [ those ] significant long-term growth themes ,” she said .

“ We see interest rates that are probably closer to coming down than not . Inflation ’ s already beginning to reduce . The consumer is broadly OK . Companies haven ’ t taken on too much debt ,” she said . “ So that ’ s not a bad setup , and really is an important opportunity to look outside this very narrow market .”

On the fixed-income side , Hoag said the current environment is “ pretty good ” from an economic perspective , but starting to show some signs of deteriorating .

“ Some areas of commercial real estate are starting to show signs of stress . Delinquencies are starting to move up in some areas with respect to loans , and credit card balances are beginning to grow ,” he said .

Hoag said how people are experiencing the current economic environment depends on where their asset levels are . Higher-income consumers are doing extremely well ,

“ Committing to a sustainable dividend policy is a really strong message from a management team . It ’ s really the clearest signal that management can give about their confidence in the future earnings growth potential of the business .”

Caroline Randall , Capital Group

he said , as inflation has a very low impact on their standard of living . Middle-incomers are doing OK , as they ’ ve got jobs and good prospects for future employment , he said . But those at lower levels are struggling to deal with the inflation that their budgets were not able to absorb .

“ In the markets , we measure inflation as a year-over-year change in price . If a hamburger was $ 2 a year ago and now it ’ s $ 3 , it went up 50 %,” he said . “ Now if it stays $ 3 for the next year , inflation is zero for that second year . But lower-income consumers are still experiencing that hamburgers went from $ 2 to $ 3 . They don ’ t have the calendar in mind .”

While inflation has come down , it hasn ’ t come down as much as Fed Chairman Jerome Powell would like , and in response he ’ s signaled just one rate cut this year , not three .

“ I do think this cycle will be a little more extended ,” Hoag said . “ And so relatively elevated interest rates for a few years would be my most likely scenario .”

Investments For The Second Half Randall said there are three kinds of companies that are particularly compelling for investment right now : those with steady , modest growth in the mid-single digits ; those that are bond proxies ( companies whose stocks go up when rates go down ); and those companies starting to get back to normal after dealing with post-Covid problems such as supply-chain disruption .

She favors three flavors of company : those involved in the energy transition ; those that are winners in their own categories ( whichever they are ); and those she calls “ fallen angels ”— companies whose historically high growth rates have been derailed by some recent trouble such as inflation , political problems or supply-chain issues . Such supply hiccups have hurt food and drink companies such as Nestlé and Diageo , for example .

She said investors this year have also enjoyed a surprise : dividends coming out of some of the tech giants like Meta , Salesforce and Alphabet for the first time . Usually dividends are more likely to come from mature industries with slowing growth prospects .

“ Committing to a sustainable dividend policy is a really strong message from a management team ,” Randall said . “ It ’ s really the clearest signal that management can give

12 | FINANCIAL ADVISOR MAGAZINE | JULY / AUGUST 2024 WWW . FA-MAG . COM