A ‘two-speed’ economy could hit your wealth

May 24, 2024

An increasingly ‘two-speed’ global economy demands that investors revise their portfolios sooner rather than later, warns the CEO of one of the world’s largest independent financial advisory and asset management organizations.​

The warning from Nigel Green of deVere Group comes as leaders gather for the Group of Seven (G7) meeting in Italy facing the challenging prospect of ever-more desynchronized monetary policies.​

He says: “The global financial environment – which is, of course, influenced by varying economic conditions and policy responses – is becoming increasingly complex due to diverging growth trajectories.”​

The US economy continues to demonstrate surprising resilience, which has significant implications for investors.​

“The Federal Reserve’s commitment to a higher-for-longer interest rate path, which is intended to keep inflation in check, of course means that borrowing costs remain elevated,” notes Nigel Green.​

“With higher interest rates investors are likely to find opportunities in financial stocks and sectors that benefit from a stronger dollar, such as imports, travel and consumer discretionary.”​

“Investors should be cautious about companies with significant debt exposure, as their cost of financing will be high, potentially squeezing margins and profitability.”​

Contrasting the scenario in the US, the eurozone is on the cusp of what could be its first interest rate cut of the year.​

“We expect the European Central Bank (ECB) to announce this in June, which will encourage investment and spending.​

“It’ll be positive for equities, particularly in sectors like real estate, utilities, and consumer goods,” comments the deVere Group CEO.​

“However, the underlying reason for the rate cut – sluggish economic growth, also signals caution. European companies may face headwinds from subdued demand and potential deflationary pressures, which could dampen revenue growth and profit margins.​

“A weaker euro, as a consequence of lower interest rates, could also impact companies that rely heavily on imports, increasing their costs.”​

In the UK, recent improvements in consumer confidence and a near three-year low in inflation are positive signals for investors.​

Prime Minister Rishi Sunak’s call for a general election on July 4 adds an element of political uncertainty to the economic landscape. The timing of the election, amid signs of economic recovery, is a strategic move to capitalize on the improving sentiment.​

“Improved consumer confidence will drive higher spending, benefiting retail and consumer goods companies. The reduction in inflationary pressures can also alleviate cost pressures on businesses, potentially enhancing profit margins.”​

Nigel Green continues: “The divergence in economic performance and monetary policy among major economies requires investors to adopt a more nuanced and diversified approach.​

“A two-speed global economy means that investment strategies must be tailored to specific regional conditions and their policy environments.”​

Investors should ensure their portfolios are well-diversified across different regions, asset classes and sectors to mitigate risks associated with economic and policy divergence.​

They might also need to consider hedging strategies to manage currency risk.​

“We would urge investors to revise their portfolios at their earliest convenience to sidestep risks and capitalize on the new opportunities to build wealth,” concludes the deVere CEO.​

About Neel Achary 19384 Articles
Neel Achary is the editor of Business News This Week. He has been covering all the business stories, economy, and corporate stories.