MONTHLY MARKET VIEWPOINT
For professional investors - Marketing Communication - June 2024

GOLDILOCKS, FOR NOW• The US economy has recently experienced the benign combinationof steady growth and slowing inflation; a sort of renewed‘Goldilocks’.

Daniel Morris
Chief MarketStrategist• The volatility in economic data since the pandemic, however,suggests the situation is unlikely to last. We anticipate growth
will slow modestly in the quarters ahead, while core inflation
remains comparatively high.
• Multi-asset portfolios remain overweight equities, which
continue to be the largest driver of risk in portfolios. Interest
rate risk accounts for around one-third of active asset allocation
risk. Duration is at median levels. Excluding a short position inJapanese government bonds, active duration is close to one year,
coming from long positions in emerging market local currency
debt, European investment grade credit and Treasury InflationProtected Securities (TIPS).

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investor for achanging world

M O N T H LY M A R K E T V I E W P O I N T - J U N E 2 0 2 4 | 2 |The latest US Consumer Price Index (CPI) inflation data was welcome news for investors andthe US Federal Reserve (Fed). After unexpectedly strong inflation in the first part of the year,
CPI inflation dropped to 0.2% on a monthly basis in May (2% annualised) from 0.3% in the priormonth. The consensus forecast for May had been 0.3%.
Encouragingly, this was not due to extreme weakness in one particular category but wasmore broad based. Core goods inflation was negative, but the big improvement was in coreservices inflation excluding shelter (often referred to as ‘supercore’), which was also negative(see Exhibit 1).
Given the lower weight of shelter in the Fed’s preferred inflation gauge, the Personal Consumption
Expenditures (PCE) index, this suggests that the May value for PCE will also be low.
Exhibit 1
Core services inflation (excluding shelter) was negative in May
Month-on-month annualised change
2.0Core CPI inflation-0.5

Core goods

2.7Core services-0.5Core services ex-shelter
Medical care commodities
Used cars and trucks
Other goods
SHELTER
Medical care services
Ed and comm services
Alcoholic beverages
Water and sewer servicesHousehold furnishings/supplies
Household operations
New vehicles
Recreation commodities
Recreation services
Other personal services
ApparelTransportation services
Ed and commun. commodities-18-15-12-9-6-30%

3691215Data as at 13 June 2024. Note: light green bars represent goods sub-indices; light blue are core services sub-indices. Sources: FactSet,BNP Paribas Asset Management.

Complementing this deceleration in inflation has been broadly positive economic growth dataover the last several weeks. The S&P Global services sector Purchasing Managers’ Index (PMI)jumped sharply in May, as did the PMI from the Institute for Supply Management.
US private non-farm payrolls data also came in above forecasts, with the seasonally adjusted
monthly figure rising to 229,000 versus an expected 165,000 and just 158,000 in the preceding
month.

Even with the soft CPI inflation data in May, the Fed reduced
the number of expected cuts for this year
The high inflation during the first part of 2024, however, led the Fed to reduce the numberof cuts it anticipates this year from three to one, in line with market estimates. It is worth
recalling that at the beginning of the year, risk assets were supposed to be propelled by the‘pivot’ from the Fed towards lower rates; markets at one point anticipated nearly seven cuts.
The unwinding of those expectations has had little equity market impact, however. This isM O N T H LY M A R K E T V I E W P O I N T - J U N E 2 0 2 4 | 3 |because the reason for the smaller number of cuts is stronger growth, and equities at least
are happy with the boost to the earnings outlook, even if it is at the expense of a higher
discount rate.

In the eurozone, unemployment is at historic lows
and wages are picking up
A key risk to the outlook for a continued decline in inflation is the labour market. The
unemployment rate in the US did move up slightly to 4.0% in May from 3.9%, but this is still
below the long-run equilibrium rate of 4.2%. Notably, average hourly earnings rose from 4.0%
to 4.1%, breaking a three-month streak of declines.
In the eurozone, unemployment is at historical lows, while the growth rate in compensation
per employee has also picked up (see Exhibit 2). With strong wage growth impacting services
inflation, higher unemployment rates may be needed before inflation moves back down.
Exhibit 2Wage gains have picked back up
Year-on-year percent change

Eurozone compensation per employee%%

US average hourly earnings
US employment cost index

5544

3

3

2212018

2019

2020

2021

2022

2023

2024

1

Data as at 13 June 2024. Sources: FactSet, BNP Paribas Asset Management.

The reduction in the number of planned cuts in the fed funds rate from three to one in therecent ‘dot plot’ suggests that the latest CPI data did not significantly change the Fed’s viewthat inflation will decrease only slowly towards target.
A key decision will come in September, when a first cut could be warranted if inflation stays
low or declines. By then, however, political considerations may become paramount. Reducing
rates so close to the US presidential election could be viewed in some quarters as interference,and in any event, a Trump victory in November could necessitate its reversal.
Growth dynamics in the eurozone are similar to those in the US, with PMIs pointing tocontinued strength in the services sector and an improving outlook for manufacturing. In
contrast to the drop in US core inflation, however, eurozone inflation rose from 2.7% to 2.9%
(driven by services).
The European Central Bank (ECB) nonetheless went ahead with its planned 25bp cut in thedeposit rate at its most recent meeting. It was viewed as a ‘hawkish’ cut as President Christine
Lagarde refrained from committing to further reductions. The ECB remains very much ‘data
dependent.

M O N T H LY M A R K E T V I E W P O I N T - J U N E 2 0 2 4 | 4 |Equities
A bit more growth and a bit more inflation have certainly not troubled equity markets. Most
major indices continue to rise and the macroeconomic environment remains supportive.
The markets are continuing to assess when and by how much the Fed cuts this year, and thereis as yet little prospect of an increase in policy rates. With steady (as opposed to rising) real
rates, equities (and growth stocks in particular) will depend more on the outlook for earnings.
Analysts’ forecasts reflect an optimistic view.

The markets with the most notable change in earnings
expectations recently are Europe and China
The markets that have seen the most notable change in forward earnings expectations over thelast month have been Europe and China (see Exhibit 3). The rise in earnings in the eurozone
is understandable as the region rebounds from the slowdown in 2023 and the ECB cuts policy
rates. US growth will pull in European exports, aided by a strong dollar.
Exhibit 3
Earnings expectations finally moving up for Europe and China
Next-twelve-month estimate, local currency terms except for regional indices in USD124

124122122120120

NASDAQ 100

118118Japan116

NASDAQ ex-Magnificent 7116

114

Europe114

112

Russell Value112

EM ex-China

110

110

China108108106106

104

104

102

102

100

100

98
Jun 23

Jul 23

Aug 23

Sep 23

Oct 23

Nov 23

Dec 23

Jan 24

Feb 24

Mar 24

Apr 24

May 2498
Jun 24

Data as at 14 June 2024. Sources: FactSet, BNP Paribas Asset Management.

The primary concern is weak domestic consumer demand. Despite the low unemployment rate
and positive wage growth, retail sales growth in the eurozone has been disappointing. Someof the wage gains have come from one-off bonuses (particularly in Germany), and perhaps
consumers prefer to save the extra income rather than spend more.
Earnings expectations have also turned up for Chinese equities. One might suppose that therecent gains in the market have been driven by these higher earnings expectations as opposed
to simply a rebound in what were very low valuations.
Unfortunately, most of the stocks in the MSCI China index are not seeing an increase in
expected earnings per share (EPS). The gains are primarily for just two companies, PDD (thee-commerce holding company that trades as Temu) and Tencent.

M O N T H LY M A R K E T V I E W P O I N T - J U N E 2 0 2 4 | 5 |As an alternative to China, and as another way to take advantage of spending on artificial
intelligence (AI), South Korea and Taiwan stand out. We prefer South Korea as Taiwan has
already performed very well both this year and last (and despite persistent geopolitical risk).
Valuations look more attractive for the South Korean market (the z-score for the forward
price-earnings ratio is 1.4 for the MSCI Taiwan index vs. just 0.3 for South Korea), and earnings
expectations are rising faster.

South Korea is another way to take advantage of the AI boom
South Korea also has greater exposure to memory chip cycle re-rating. The pricing for memory
chips has been depressed but is now starting to recover, in large part due to the demand forthe DRAM chips used in AI servers.
South Korea is also typically a beneficiary of any upturn in the global manufacturing cycle;
this could particularly be the case now when inventory levels are low.
While earnings expectations continue to rise for the MSCI Japan index, the market has lost thesupport of a weakening currency. With policy rates finally in positive territory, and the Bankof Japan intervening in the market, the USD-JPY exchange rate has been stable at around JPY
156 per USD. The relative performance of Japanese equities (MSCI index) has since suffered(see Exhibit 4).
Exhibit 4
Japenese equity outperformance has waned as yen depreciation stalls
Kokusai = developed market equities ex-Japan%

158
156
154
152

0.10

Yen per dollar (rhs)Japan vs Kokusai (hedged, lhs)
Policy rate (rhs)0.051500.00

148-0.05

146
144-0.10142140
Dec 23

Jan 24

Feb 24

Mar 24

Apr 24

May 24-0.15

Data as at 14 June 2024. Sources: FactSet, BNP Paribas Asset Management.

Other worries are that wage gains and consumption are pausing, inflation is trending down,
consumer confidence has declined, and business confidence is still low. Our multi-asset teamhas reduced its overweight to the market, but still views the earnings outlook as supportive.

M O N T H LY M A R K E T V I E W P O I N T - J U N E 2 0 2 4 | 6 |Commodities
Gold prices have moved in a range between USD 2 300 and USD 2 400/ounce since April. We
believe there remains significant fundamental support for the asset. There is steady appetitefrom central banks in an increasingly multi-polar world and investors are seeing ever morevalue in gold’s ability to hedge against geopolitical risk and inflation.
In the near term, a recovery in manufacturing should also be supportive. Our recent article,“Geopolitical risk in a multipolar world leads gold price higher” provides a more detaileddiscussion.

M O N T H LY M A R K E T V I E W P O I N T - J U N E 2 0 2 4 | 7 |ASSET CLASS VIEWS
MULTI ASSETFIXED INCOME• We remain overweight equities
despite the slight reduction from
historical peaks last month;
equities remain the largest
driver of risk in portfolios,
though interest rate risk stillaccounts for around one thirdof active asset allocation risk inportfolios.

• Rate cuts are on the agenda
in 2024 in the US and theeurozone, but central bankers
have tried to push back theassumption of a large cutting
cycle. June has seen the startof the first round of cuts for theECB.

• Duration is at median levels(approximately zero activeduration). Excluding the shortposition in JGBs, active duration
is close to +1yr; this comes,
in equal proportions, from longpositions in EM Local Debt,
European Investment Grade
Credit and TIPS.
• Asset allocation risk (inparticular, from equities) wasbroadly unchanged over May
and remains high – in the top
quintile since the start of 2022.
• In early May we removed theoutright short CHF-JPY position
on continued JPY weakness.
The long Japan Equity position
was halved and remains
unhedged; the overweight in
US Equity was doubled in sizein our unconstrained modelportfolio. In bond portfolios,
we added a long positionin Global Convertible Bonds.
• We increased our positive
conviction in Precious Metals,
doubling the position size in ourunconstrained model portfolio.
Overweights in EM Equity werereduced slightly to maintain aconsistent level of market risk.
• We closed the small, tactical
overweight in China Equity
towards the end of May; wereplaced this position with
South Korea Equity.
• We added a relative value
position in the European Energy
sector versus the market;
metals have led commodities
higher and more recently, gas
and oil have also started torebound. Resource nationalism
is intensifying in a multipolarworld and energy offers good
hedging properties against
inflation & international
tensions.

• Following the recent increasein rates, across maturities, weincreased our exposure towards
duration to an overweight.
We prefer euro duration to USduration. We still like the 0–3years segment that could benefit
from this environment.
• With a bias towards slightly
more growth in the eurozone
in the coming months, andtechnical support for high yieldfrom buyback operations, thisshould be supportive for credit
spreads. We have increased ourbeta exposure to Investment
Grade and High Yield.
• The time for reinvesting inEmerging Market debt isgetting closer and the start ofthe easing bias would be thesignal everyone is waiting for. As
always, flows drive this sectorand we have freed up some riskbudgets in order to be able toinvest ahead of the pack.

GLOBAL EQUITIES• We have a constructive
view on global equities for2024 underpinned by strong
fundamentals with:• Earnings recovery: earnings
growth is set to resume in2024 with consensus seeing
double-digit earnings growthin the US market. This comes
after near 0% growth in 2023
and importantly, more sectors
are seeing a pick-up in EPS
growth versus 2023 leading
to a broadening of leadership.
Indeed, the post COVID years
have been characterised bydesynchronisation between
goods and services. We saw
stark divergences in various
end markets with, for instance,a healthy recovery in air travel
while rail volumes were still
depressed owing in part toinventory normalisation ingoods.
• Stronger economic growth: US
growth strongly surprised on theupside in Q1 prompting upwards
revisions to the full year
number. Although growth has
been slowing since, the economy
is still expected to deliveraround trend growth in 2024.
• This is constructive for equities
but note that while recession
risk has been reduced,
geopolitical risk remains. As
such we have been marginallyadding to beta in our portfolio
and are now slightly greaterthan one, and are adding tosmall- and mid-cap stocks,
which should benefit frombetter economic prospects
and monetary policy easing.
Regionally, we have a preference
for the US and Japan where
earnings growth is stronger.

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June 2024 - Design: Creative Services BNPP AM - P2406005

Please note that articles may contain technical language. For this reason, they may not be suitable for readers without
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are based on available information, and are subject to change without notice. Individual portfolio management teams
may hold different views and may take different investment decisions for different clients. This document does notconstitute investment advice. The value of investments and the income they generate may go down as well as up and
it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.
Investing in emerging markets or specialised or restricted sectors is likely to be subject to a higher-than-average
volatility due to a high degree of concentration, greater uncertainty because less information is available, there isless liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).
Some emerging markets offer less security than the majority of international developed markets. For this reason,services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may
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investor for achanging world