The investment research and managed account provider has taken overweight positions in both asset classes, highlighting that quality companies are also expected to benefit in a soft-landing scenario.
“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,” Zenith’s co-founder and investment director, David Wright, said.
He added that quality in equities is represented through strong balance sheets, stable earnings, growing earnings and low levels of debt.
Global small caps, meanwhile, have been attractively valued for some time.
“On the sentiment side, certainly price momentum and rising risk appetite is apparent and that’s a positive,” Wright said.
Assuming a soft landing as its base scenario for some time, Zenith noted that such outcomes are “actually quite rare” and come with risks, according to Damien Hennessy, head of asset allocation.
Despite a “very aggressive rate-cutting cycle in the US”, Hennessy explained, markets are reconsidering the likelihood of further cuts, given the economy’s resilience.
“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.
US election
According to Zenith, a split Congress is the most likely outcome of the US election, regardless of whether Donald Trump or Kamala Harris wins the presidency.
Hennessy noted that under a Trump presidency with a split Congress, bond yields would likely peak, equities would improve, and the US dollar would see a slight uptick. In contrast, a Harris presidency would still support equity improvement but lead to lower bond yields and a softer US dollar.
“There’s also been talk of a Republican clean sweep,” he said.
This scenario assumes a policy mix which includes 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.”
