Outlook | 1H 2025
Executive summary
The new US administration will be more inward-looking, with an overall pro-growth agenda that includes tax cuts and deregulation. It has also significantly reduced fears of an imminent recession. However, these measures, combined with higher tariffs and more restrictive immigration policies, will add to inflationary pressures, and could force the Fed to slow or even question its rate-cutting cycle.
The combination of robust growth, loose financial conditions and healthy corporate balance sheets means that we remain optimistic about the credit segment. We favour high yield (HY) across all regions due to the attractiveness of the all-in yield. We are more cautious on investment grade (IG), not only because of extremely tight spreads, but also because of greater interest rate sensitivity.
Despite rising policy risks, the overall environment remains supportive for equities. With earnings growth expected to reach 15% in 2025, the US market should retain its structural advantage over other developed markets, but these ambitious estimates will be difficult to achieve and could lead to negative surprises, particularly for technology mega-caps.
Economic Outlook
US election resolution brings clarity to markets
Global growth remains resilient in 2025, in line with 2024 estimates
Growth divergence among developed economies widens
Global developed market policy rates normalizing
Fed rate cuts to be more measured
Inflation tilted to the upside, especially in the US under Trump 2.0
Key Risks
Fed forced to raise rates by one-off and persistent inflation shocks
Economic slowdown without fall in inflation leads to rise in term premiums
Ineffective policies lead to Japanification of Chinese economy
Japanese real interest rates on the rise
Investment Convictions
Eurozone growth headwinds give European Central Bank (ECB) room to cut rates
US yield curves could rise in 2025, adding duration if 10Y yield rises to around 5.0%
EM corporate spreads attractive, but volatility expected as trade tariffs unfold
Supportive policy should continue to underpin US Small and Mid-Caps
Interest-rate differentials remain as catalyst for flows into dollar-denominated assets
Table of contents
- OUTLOOK H1 2025 : EXECUTIVE SUMMARY
- 2024 REVIEW : KEY HIGHLIGHTS
- OUTLOOK 2025
- INVESTMENT CONVICTIONS
- ASSET CLASS VIEWS
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Newsletter | November 2024
Euro area headline inflation below ECB’s target in September
-5.2% PERFORMANCE OF THE US LONG TREASURY INDEX
Investment perspective
After a month in which all eyes were on central banks, October focused on the future of economic growth, particularly in the US, before early November gives way to the great circus that is the US election. On the growth front, the IMF's latest publication raised its forecast for US economic growth to 2.7% in 2024, up 0.6 percentage points from its January forecast. The move underlines how the US is outperforming other developed economies. The strong performance of the US economy mainly reflects robust productivity gains and employment growth. Labour productivity in Europe is lower than in the US. A lack of investment, especially in technology, has led to a growing divergence in income per capital on both sides of the Atlantic. Former European Central Bank (ECB) President Mario Draghi, in a report commissioned by the European Union (EU), proposed increased investment, financial market reforms and greater regional integration to boost productivity in response to accelerating competition from leading companies in the United States and China. The removal, albeit partial, of uncertainty about the future and pace of monetary policy normalisation has temporarily pushed inflation into the background. This is a very temporary situation, as the return of a possible Republican victory in the upcoming US presidential election is causing renewed concern in the interest rate market, not least because of the fiscal slippage and tariff increases advocated in the Republican platform. Treasuries have sold off sharply, with the yield on the 10-year Treasury rising 60 basis points, reflecting both stronger-than-expected economic growth and more inflationary policies in the event of a Republican victory. The proximity and closeness of the US election has pushed volatility higher. Implied volatility in the US Treasury market has risen by almost 40% since the end of September. The rise in bond yields, and in particular the expected yield differential between the US and other countries, has led to a strengthening of the dollar against almost all developed and emerging market currencies.
Investment strategy
Following the interest rate cuts by the major central banks in the developed world, except for Japan, the path towards a "soft landing" scenario has become the most likely. In terms of seasonality, we're entering the most productive part of the year for the US equity market. Since 1945, the months of October, November, and December have averaged gains of 1.04%, 1.56%, and 1.58%, respectively. However, it is interesting to note that the month of October, in a presidential election year, saw a decline of 0.46% without affecting the behaviour of November and December. At the end of October, the US index was down 0.9%, broadly in line with historical performance. At the time of writing, the forecast remains a perfect toss-up. Christophe Barraud, ranked by Bloomberg as the best economic forecaster of the US economy over the past 11 years, predicts a Trump victory in the upcoming election. If Trump wins and Congress is divided, much of the domestic agenda would be stalled, which could lead Trump to retreat into tariff wars that could slow the US economy and hinder global growth. We continue to believe that economic data, particularly in the US, remains supportive, e.g. labour market, consumer confidence, monetary support and earnings growth will continue to underpin US equities, but we recognise that inflationary policies will put pressure on long-term interest rates.
Regardless of Who Takes over the White House, Economy will Likely Continue to Move Along
Portfolio Activity/ News
The swing in the polls towards a Trump victory on 5 November has dictated a more cautious approach to US interest rates. Indeed, rising government deficits and tariffs are likely to push up long-term interest rates. As we have seen in recent weeks, we could therefore see a bear-steepening (lower short-term rates and higher long-term rates). We have reduced long-dated US Treasury positions in favour of medium-dated US bonds with maturities of 3 to 5 years. We maintained our long euro zone bonds as the fundamentals continue to point to a general downturn. In Switzerland, we had already fully exited our government bond exposure in favour of real estate investments. The macro context remains supportive for equities, even if we could see volatility increase in this earnings season and just a few days before the US elections. We would take advantage of any excess weakness to buy the dip. It looks increasingly likely that Europe could be the victim of a second Republican term. We first downgraded our European equity rating to neutral in September on the back of political uncertainty. To reflect recent dynamics, we are now downgrading European equities to negative despite attractive valuations. In mid-October we also reduced our positions in European small and mid-caps. On the currency front, we have taken advantage of the dollar's weakness to add to our positions across all our currency bases. Since the end of September, the US dollar has gained 2.8% against the euro. We remain positive on the US dollar in the short term. Against a backdrop of high divergence and volatility, we remain convinced of the benefits of liquid alternative strategies such as global macro, alternative trend and even long/short strategies, whether in equities or credit.
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Newsletter | October 2024
European Central Bank cuts rate, again while the Federal Reserve cut by half a point
+23.1% PERFORMANCE OF THE CHINA A ONSHORE SHARES
Investment perspective
September marked a milestone for the central bank after more than two years of fighting inflation, with the Federal Open Market Committee (FOMC) announcing a 50bp cut and hinting that more cuts were on the way. In the latest 'dot plot' of officials' projections, most expect the federal funds rate to fall to 4.25%-4.5% by the end of 2024, implying another half-point cut. Policymakers also expect the funds rate to fall a further percentage point in 2025, ending the year between 3.25% and 3.5%. In Europe, both the European Central Bank and the Swiss National Bank cut interest rates in September, the former for the second time by 25 basis points and the latter for the third time, as inflation slowed and concerns about the eurozone economy resurfaced. The increased visibility provided by these clarifications allowed short rates (the front end of the curve) to fall sharply in the second half of September. This monetary easing is taking place against a backdrop in which the inflation battle of recent quarters appears to be on the winning side, as confirmed by the latest inflation figures, particularly in Europe, where headline inflation is already approaching the European Central Bank's 2% target. These cyclical dynamics reinforce the soft landing thesis and enabled both bond and equity markets to post positive performances in September. This optimism also pushed many sentiment indicators into the green, providing further support for risky assets. In equities, the prize went to Chinese equities, which benefited greatly from government measures to support the economy. Indeed, the various categories of Chinese equities rose by more than 23% in a matter of days. The start of the monetary easing cycle in the US weighed heavily on the US currency. As measured by the dollar index, the US currency fell for the third month in a row, for a cumulative decline of 4.8% over the third quarter. Among commodities, the divergent performance of gold, up 5.7%, and oil, down 7.3% over the month, was notable.
Investment strategy
Since the beginning of the year, seasonal effects have produced some surprises. April, usually a positive month for equities, was down sharply this year, while September, feared by many, turned out to be a very positive month. If history repeats itself, we should have a positive fourth quarter for equities, including October which, contrary to popular belief, remains a buoyant month. As central banks clarify their policy normalisation, which the market has already partially priced in, risk appetite remains favourable, reinforcing our constructive stance, particularly on equities. It is crucial to recognise that market leadership will continue to evolve, as we have seen on several occasions this year, albeit without much repetition, at least so far. On the bond side, we continue to rotate into duration at the expense of credit. We are differentiating our stance more clearly by region, with a broad preference for European duration and a more cautious stance on US duration. Notwithstanding the recent announcements in China, which we naturally welcome, we are increasing our weighting in emerging markets due to their favourable economic and monetary dynamics. In terms of the currency mix of our portfolios, we are taking advantage of the recent weakening of the US dollar to increase our US currency exposure in Swiss franc and euro accounts.
Given Current Disinflationary Environment, the FOMC’s Half-Point Cut is an Appropriate Recalibration
Portfolio Activity/ News
Following the FOMC announcement, we decided to reduce our credit exposure and hence our bond exposure, while maintaining a high interest rate sensitivity, except for Swiss duration, where the potential is limited. It is worth noting that the rotation of bonds this year towards greater interest rate sensitivity (duration) made a positive contribution to performance, as did our exposure to credit and emerging market debt. Having increased our bond allocation as opportunities arose in the cycle, it is now time to reduce it, particularly high yield, in favour of equities. The proceeds allowed us to increase our allocation to emerging markets through an actively managed global emerging markets equity fund with a distinctive and unique approach. Apart from emerging markets, we increased our exposure to US equities and, to a lesser extent, European equities. We have generally used passive instruments for quick and efficient execution. For dollar accounts, our tactical view on the dollar is to favour an approach based on hedging non-dollar currency exposures. For our Swiss franc accounts, where we have aggressively reduced the non-Swiss franc weighting - a good decision given the appreciation of the franc - we believe it is appropriate to increase our investments not only in emerging markets but also in US and European equities. We have also increased our exposure to the US dollar by converting a portion of our alternative investments, previously hedged against currency risk, into a US dollar tranche.
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Newsletter | September 2024
The Federal Reserve (Fed) is ready to cut interest rates… and SOON!
-2.3% THE PERFORMANCE OF THE DOLLAR INDEX
Investment perspective
The beginning of the month was marked by a sharp sell-off triggered by weaker than expected non-farm payrolls and a rise in the unemployment rate for July, which raised concerns about US growth, and then the Bank of Japan's decision to raise interest rates for the second time this year. Markets reacted quickly. In the first few days of August, global equity markets plunged and bond spreads widened sharply. In the space of a few days, the main US index fell by more than 6%, while the Magnificent Seven fell by almost 10%. The initial sell-off was exacerbated by the unwinding of carry positions on the yen, triggered by the divergence in monetary policy expectations between the Bank of Japan, which is in rate hike mode, and the Federal Reserve, which is expected to begin its monetary easing cycle at its September meeting. These growing uncertainties led to a spike in volatility, with the VIX peaking above 65 in early August, one of the highest level on record. However, as markets gained confidence in the resilience of the economy, strengthening the case for a soft landing, the VIX fell back to levels around 15. Fortunately, the stress was short-lived and the recovery was swift, with the global index closing the month up 1.9% in local currency terms. The latest consumer price index (CPI) readings in Europe and the United States were down, well within the central banks' target ranges and clearly decelerating. This would further increase the likelihood of interest rate cuts. Credit spreads widened in sympathy before closing the month on a tighter note, while the yield curve steepened, with the 2-year benefiting the most from the increased likelihood of rate cuts. In this context, all fixed income segments posted positive returns over the month, with emerging market debt the best performer, followed by global high yield. The optimism surrounding the US rate cut claimed its first victim: the US dollar, which fell sharply against the major currencies (-2.5% against the euro) and even erased all its year-to-date gains against the Swiss franc. Finally, gold prices remained buoyant (+2.3%), while oil prices continued to fall, with WTI down 5.6% following a 4.5% fall in the previous month.
Investment strategy
After the market jitters of early August, which forced many players to rethink their stance and significantly reduce their leverage, the spotlight is back on the central banks. The Fed is likely to begin its monetary easing cycle in September. The market has priced in an aggressive bearish campaign, as it did at the start of the year. Those expectations were overly optimistic and forced the market to reassess the timing and magnitude of rate cuts. This time, however, the conditions for a rate cut appear to be more favourable, thanks to the slowdown in consumer price inflation brought about by a softer labour market. The upcoming labour market data will be crucial as it will determine the pace of rate cuts. The Fed is likely to cut rates by 25 basis points in September and the SNB is likely to follow suit. Although sentiment and momentum indicators briefly gave buying signals, especially for US equities, we decided to leave our exposure virtually unchanged. The rapid rebound in the markets quickly brought us back to a more neutral zone. We are clearly at a crossroads, especially as we enter a seasonally difficult period, but for the time being we remain constructive on both developed and emerging market credit and equities. August reminded us how heterogeneous alternative strategies can be, even within a single category such as trend strategies (CTAs). We reiterate our commitment to alternative trend strategies, which proved resilient in the sell-off as they are less exposed to crowding effects.
The ECB Minutes Indicate That, in July, Members Had an “Open Mind” About Further Rate Cuts
Portfolio Activity/ News
After a few days of intense stress, markets calmed down and ended the month on a very positive note across all asset classes, except for some global macro and trend strategies. During the month, we took advantage of price differentials to slightly reduce our exposure to emerging market debt, which reduced the negative impact of the weakness of the US dollar against the Swiss franc and the euro. In fixed income, we have maintained a high interest rate sensitivity, not only to benefit from falling inflation, but also to provide a cushion in the event of a more pronounced economic slowdown. This position was built up gradually and played its full role during the tensions of early August. After a brief spike, credit spreads returned to their end-July levels, giving us the highest return in the bond segment over the month. We continue to have confidence in corporate bonds across the board, from investment grade to high yield, in both developed and emerging markets. The increase in volatility provided us with a good opportunity to rebalance our allocations. Against this backdrop, we are maintaining our preference for European equities over US equities, especially after the turmoil caused by the political posturing in France. Having been cautious on emerging markets, the prospect of an interest rate cut in the US encourages us to be more constructive on these markets. As a result, we have finally exited China as a dedicated allocation in favour of an increased weighting in global emerging markets. The most significant change in our allocation has been the increase in the weighting of alternative strategies, in particular global macro strategies, where we have almost doubled the weighting.
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Newsletter | August 2024
European Central Bank (ECB) left its benchmark interest rates unchanged
10.2% THE PERFORMANCE OF THE RUSSELL 2000
Investment perspective
July was a turbulent month, particularly in the second half, but marks a turning point in the relative performance of small and large caps. US indices ended the month in positive territory, with small caps posting a stellar 10.2% return, in contrast to the tech-heavy indices, which fell during the month. Global economic growth slowed slightly in July. At its current level (52.5 in July versus 52.9 in June), the global PMI is consistent with the global economy growing at an annualised rate of 2.8%, compared with an average growth rate of 3.1% in the pre-pandemic decade. In the US, inflation fell below 3% and was well below expectations, while the core personal consumption expenditure price index rose by a seasonally adjusted 0.1% in the month and was 2.6% higher than a year earlier. The US labour market continued to weaken, with the unemployment rate rising to 4.3%, although the labour force participation rate rose and job growth remained relatively stable. New and existing home sales fell in July, while median sales prices for existing homes reached another all-time high. The continuation of this disinflationary trend supported market expectations that the Fed would finally begin to ease policy at its September meeting. This welcome news on the inflation front helped US Treasury yields to fall sharply, with the middle of the curve posting the largest month-on-month declines. The bond indices all posted positive returns, with the long-dated government segments posting the best results thanks to the easing in the interest rate component of the bond markets. The US long-dated Treasury index gained 3.6%, its best month since the beginning of the year. After a difficult June, the European market performed in line with the US indices in July. However, dispersion was high across regions. The Swiss market (+2.7% in local currency) and the UK market (+2.5% in local currency) performed very well, while the Eurozone index continued to lag, rising 0.4% in local currency over the month. The performance of commodities was mixed. Gold rose by 5.2% while crude oil (WTI) fell by 4.5%.
Investment strategy
The market has become more confident that interest rates will fall soon, with the probability of a Federal Reserve rate cut in September rising from 72% to 92%. The acceleration in rate cuts should also be seen in the context of the target level of the interest rate at the end of the easing cycle, the so-called terminal rate. Here, too, expectations have fluctuated widely. After a trend of steady upward revisions since January, reaching a high of over 4.9% at the end of May, short-term interest rate expectations for January 2025 have fallen back to the level expected at the beginning of the year, i.e. an implied interest rate of 3.8%. This downward shift in expectations has been massive and contrasts with the consensus view of just a few weeks ago. This trend was exacerbated by the panic in global equity markets at the beginning of August. Are we witnessing a major shift in US economic expectations that, if confirmed in forthcoming data, will force the Federal Reserve to cut interest rates not in line with falling inflation, but as a matter of urgency to save the economy? Although we might have feared an increase in the risk of the slowdown scenario reappearing as likely, the macro data remain constructive overall, but the risk of exaggeration and reversal remains as high as ever.
Powell Suggested a Rate Cut Could Come in September, the Fed’s Next Meeting
Portfolio Activity/ News
The dramatic risk-off moves in recent days, such as the fall in global equity markets and digital assets (e.g. cryptos), remind us of the importance of a balanced position in our portfolios at this stage of the cycle. In fixed income, we have increased our exposure to government bonds to take advantage of the more accommodative monetary policy, but also as a hedge against a more pronounced economic slowdown. We are currently evaluating whether to continue the rebalancing of our bond portfolio, but we expect to be in a better position to do so in the coming months. In equities, we gradually became more cautious during the second quarter, reducing our equity allocation and favouring more defensive strategies such as long/short. We had no positions in Japanese equities and, until recently, were cautious on emerging markets. Our more diversified positioning should allow us to ride out this turbulent period with greater composure and take advantage of any opportunities that may arise in the event of an exaggeration. We are maintaining our current allocation as long as the technical levels of the uptrend remain intact. However, we are aware that the market's momentum has slowed and this alone could justify a continuation of the adjustments we have made in recent months. If such a reversal were to occur, we would initially reduce our equity exposure and reduce our credit exposure in developed and emerging markets in favour of medium- and long-term government bonds.
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Outlook | 2H 2024
Executive summary
We favour a more balanced positioning across and within asset classes. We believe that bond yields, including those on government bonds - something new for this segment - are attractive. Credit carry is attractive relative to corporate fundamentals, while long-dated government bonds offer protection in more difficult times in addition to their real yield.
Favourable economic data and the prospect of interest rate cuts, i.e. the ingredients of the soft-landing narrative, together with solid quarterly earnings, justify a constructive stance on equity markets. However, we would like to see a broader participation in the market rally to reduce the fragility of the bull cycle that started in early 2023.
While maintaining an allocation to the technology sector and the famous seven giants, we are balancing our portfolios with exposure to small/mid-caps and the value style, where valuations appear to offer significant catch-up potential.
Economic Outlook
Real GDP forecasts lowered for the US and Japan. China and euro area upgraded
Monetary easing becomes more widespread
Fed and Bank of England will remain on hold until September and August, respectively
FOMC dot plot implies only one 25 bps cut by year-end and four in 2025
Fannie Mae predicts that US mortgage rates will average 7% in 2024
Key Risks
Sharper slowdown in the US as labour market deteriorates sharply
US/China and EU/China trade war intensifies
Sovereign debt crisis forces governments to cut spending
Populist drift at the ballot box, testing the foundations of our democracies
Investment Convictions
Fixed income generally does well when the Fed pauses
Long-dated government bonds as a hedge against renewed recession fears
Inflation dynamics favour European over US rates (10-Year +)
EM corporate bonds offer wider spreads and diversification benefits
Prefer EU Fantastic Five to US Magnificent Seven
Small/Mid-Caps offer compelling valuation and economic sensitivity
Add value stocks for their relative valuation and diversification
Table of contents
- OUTLOOK 2024
- A BRIEF REVIEW : THE FIRST HALF OF 2024
- MID-YEAR OUTLOOK
- INVESTMENT CONVICTIONS : THE SECOND HALF OF 2024
- ASSET CLASS VIEWS - 2H 2024 : SHIFTING TO NEUTRAL
Download the Outlook 2H 2024
Newsletter | May 2024
Global economic growth expanded at the fastest pace in ten months
15.65% THE PERFORMANCE OF THE SILVER PRICE
Investment perspective
April's correction seems almost forgotten thanks to May's rally, which took equity markets to new highs. But June is likely to be another volatile month, with the monetary policy decisions of the major developed central banks on the agenda. Recent economic data, particularly on the inflation front, has been broadly in line with consensus expectations, albeit with a glaring lack of progress towards the central bank's ultimate target of 2.0%. In the US, the personal consumption expenditure (PCE) price index excluding food and energy rose 0.2% in April (in line with estimates) and 2.8% year-on-year, or 0.1% above the estimate. More important, however, is the direction of core inflation. In April, core prices were up 3.6% year-on-year, down from 3.8% in March and up 0.3% month-on-month, the smallest monthly increase since December. In the UK, inflation continued to fall in April to its lowest level since July 2021, with consumer prices up 2.3% year-on-year. However, core prices, which strip out volatile food and energy prices, were up 3.9% year-on-year. Probably still too high for the Bank of England. Eurozone inflation rose 2.6% in May, higher than expected, while core inflation rose to 2.9% from 2.7% in April. Although May's figures were better than expected, it's worth remembering how far we've come since the peak of 10.6% in October 2022. May mirrored April across all fixed income segments. Bond indices were all in positive territory over the month. High yield (HY) markets and emerging market debt (EMD) more than recouped April's losses. Despite the rebound in May, the corporate investment grade (IG) segment remained in negative territory for the second quarter, with a negative return of 75 basis points for the quarter to date after a lackluster first quarter. With PMI indices in the major regions in the range generally associated with expansion (above 50) and encouraging developments in the eurozone, equity markets reached new highs in May. The US large cap segment gained 4.9%. In terms of investment style, growth outperformed value with a gain of 6.0% compared to 3.2% for value, while small caps returned over 5.0% for the month. Although European indices underperformed their US counterparts (+3.3% in euro terms), the Swiss equity market staged a comeback, rising by 6.3% in local currency terms.
Investment strategy
Recent publications have partly allayed immediate fears of an uncontrolled resurgence of inflation, allowing US long-term rates to ease slightly over the month. As a result, the ECB is widely expected to cut its key rates on June 6th, and any other decision would be a major surprise. With the economy and labour market in relatively good shape, the Fed is expected to keep rates on hold until it sees more evidence that inflation is on track to reach its 2% target. The all-in yield, as well as the hope of capital gains once the central banks start cutting rates, has made fixed income quite attractive. These factors have attracted investors, as evidenced by flows into the corporate bond market. According to the latest release from Bank of America, investment grade (IG) corporate bonds recorded their 31st positive weekly flow, with $3.6bn in the week ending last Wednesday, the longest streak since 2019. Despite the strong inflows, fixed income markets, particularly those with high interest rate sensitivity, have suffered. The ongoing inversion of the yield curve, caused by a slower decline in inflation towards the central banks' ultimate target of 2.0%, has led to greater caution regarding the speed and amplitude of policy rate cuts. This recalibration of interest rate expectations has made short-term bonds, and to some extent cash, attractive because of their favourable interest rate risk/return profile at a time when the path of interest rates is still quite uncertain.
One Stock Driving the Magnificient 7’s in 2024: NVIDIA +138% as of May 29th Close
Portfolio Activity/ News
After two months of fairly balanced returns in fixed income markets and modest gains in economically sensitive assets such as credit spreads and equities, we maintain a balanced positioning across asset classes, regions and sectors. Thanks to attractive all-in yields, our positioning remains broadly exposed to credit, which should continue to benefit from the growing acceptance that global economic growth will remain resilient and even improve in some regions. Admittedly, credit spreads have already tightened considerably in response to this favourable environment and are trading below the median spreads of the last 5, 10 and 30 years. However, while spreads reflect a lot of positive news, they have historically shown that they can remain tight for extended periods of time. Given the reduced uncertainty about the near-term path of US long-term rates, the improvement in emerging market economies and the easing of election deadlines following the results in Mexico and India, we are increasing our exposure to USD-denominated EM corporate debt. As we did a few months ago, we have added a long/short equity position within our European equity exposure to increase the resilience of this segment. In emerging markets, we maintain our conviction in Chinese domestic equities. It should be noted that our dedicated EM exposure is largely achieved through a dedicated bond component, which currently offers a more favourable risk/return profile than emerging market equities excluding China.
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Newsletter | April 2024
NVIDIA accounted for 41% of the year-to-date gain in the US Large Cap Index
13.91% THE PERFORMANCE OF THE COPPER PRICE
Investment perspective
The paths of the major economies are increasingly diverging. In the United States, economic activity continues to expand, ruling out a recessionary scenario induced by cumulative monetary tightening. While US growth has probably peaked, it cooled more than expected in the first quarter of the year, growing at an annualized rate of just 1.6%, down from 3.4% in the fourth quarter of last year. Disinflation began in late 2022, but the pace of decline has slowed in recent months. Weaker growth combined with stubborn inflation could take us into the realm of stagflation, a term that has horrified most central bankers, as the last comparable situation was in the 1970s following the rise in oil prices caused by the Arab oil embargo. The euro area manufacturing sector continued to contract in April, but some positive developments should be highlighted, such as factory output shrinking at the slowest rate in a year. In contrast to the US, where the disinflation process has stalled, at least temporarily, European inflation has continued to fall, with the headline rate falling to 2.4% in March. April saw negative returns across all fixed income segments as long-term rates came under pressure. The 10-year US Treasury yield rose from 4.2% to 4.7%. European yields were not immune to this trend, with the 10-year Bund ending the month 30 basis points higher at 2.6%. Recent economic data spooked investors and triggered a general downturn, except for emerging markets. US blue chip equities fell by 4.2%. The decline was even more pronounced in the small cap segment, which fell by 7.0%. European equity indices fell less than their US counterparts, with little difference in market capitalization. The main European index fell by 0.9% in euro terms. The Japanese market was not immune to the selling pressure, falling 1.1% in local currency terms, exacerbated by the accelerating depreciation of the yen of around 4% in April alone. In China, the publication of better-than-expected GDP figures provided some relief to the growth momentum of the world's second largest economy. In the short term, the Chinese market rose by 6.6%, bucking the general decline in developed equity markets. Commodities can act as performance enhancers and offer countless opportunities. After gold and silver in March, base metals such as copper and zinc took over in April. Copper rose 13.9% over the month, benefiting from China's awakening and fears of tighter supply.
Investment strategy
The divergent paths of growth and inflation will force each central bank to pursue divergent monetary policies, in contrast to what we saw during the synchronized rate hike cycle. We still expect developed central banks, led by the Europeans, to start normalizing policy rates in June. As far as the Fed is concerned, it may postpone its first cut until September, with a more gradual pace than initially expected. Higher rates make bonds quite attractive from a valuation point of view. However, we remain cautious on duration. Our central scenario remains a steepening yield curve, which favors intermediate maturities given the current flat yield curve. Credit spreads have tightened, reflecting the growing acceptance of the soft-landing scenario. US equities remain relatively vulnerable to "higher for longer" rates due to high valuations (all measures well above multi-year averages and close to the highest levels in over two years). European equities look attractive relative to the US, especially if the ECB starts cutting rates in June. Pressure on the Japanese yen could trigger either higher interest rates or currency intervention, both of which would lead to tighter financial conditions, which are not favorable for Japanese equities. The outlook for Chinese equities has brightened and offers attractive relative undervaluation.
Q1 2024: US companies report higher net profit margin quarter-on-quarter
Portfolio Activity/ News
We had highlighted the favourable seasonality of April in terms of market returns and the critical levels reached by various technical indicators. This technical configuration led us to be more cautious in our allocations than at the beginning of the year. A cautious stance was clearly rewarded during the month, whereas blindly following historical observations would have resulted in significant losses. Against this volatile backdrop, it is worth noting the positive performance of our L/S manager in US equities, which delivered positive return. To take account of the deterioration in the technical picture, particularly in US 10-year Treasury yields, we reduced our equity allocation during the month in favour of cash. We continued to make adjustments to the composition of our equity portfolio. We took profits on so-called growth stocks in the US, Europe and globally and reallocated part of the proceeds to value managers in order to achieve a better sector balance and factor exposure (value versus growth). We have not changed our bond positioning, which remains generously exposed to credit (IG and HY) and emerging markets. The sensitivity to volatility remains moderate, given the flat yield curve and the expectation that the curve will steepen. We recognise that at these yield levels, rates are competitive and offer good protection in the event of a more pronounced economic downturn. We maintain our weighting in liquid alternative strategies, which should continue to add to performance, as they have done since the beginning of the year, thanks to their exposure to commodities.
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Newsletter | March 2024
The US Large Cap Index hit eight new closing highs in March
10.09% THE PERFORMANCE OF SILVER PRICE
Investment perspective
Despite the most aggressive tightening cycle, the US economy continues to defy the historical relationship between economic growth and interest rates. We expect US real GDP to grow by around 2% this year, with the potential for upside surprises. Recent headline inflation readings have pointed to some upward pressure, while core inflation has declined slightly, without calling into question our central scenario of a gradual decline in inflation towards 2.0%. Eurozone inflation surprised to the downside in March, with headline inflation coming in at 2.4% year-over-year, below the consensus of 2.6%. The SNB, acting very independently, surprised the market by starting the long awaited cycle of rate cuts among developed central banks. The Fed and the ECB have reiterated their intention to cut rates several times this year and next. Despite higher-than-expected inflation rates, the Fed expects that stronger than-expected labor force growth and increased investment will stimulate the supply side to the point that inflation will continue its downward trend. The BoJ raised its key rates (dovish hike) but will continue to buy large amounts of government bonds each month. The 10-year US Treasury yield fell slightly to end the month at 4.2%, while in Europe the 10-year Bund followed the same trend to end the month at 2.85%. US large cap equities hit eight new closing highs in March, rising 3.1% for the month. Breadth improved over the month and was strongly positive, with the equal weight index gaining 4.4%. We are seeing an increasing divergence in the return patterns of the Magnificent Seven, with Tesla down 29.3% year-to-date. European equity indices rose by 4.4% in euro terms over the month, outperforming their US counterparts. It should be noted, however, that while the market breadth is also underway, it is still very tentative. In line with the start of the year, emerging markets continue to lag, while the Japanese market continues to deliver an excellent return in local currency terms, up more than 19% year-to-date. The highlight of the month was undoubtedly the surge in gold and silver prices, up 8.3% and 10.1% respectively over the month, as lower interest rates increase the appeal of holding non-yielding bullion.
Investment strategy
The near-term growth outlook in the US remains solid, with economic data continuing to surprise on the upside. The median forecast for real GDP growth in 2024 has risen from 1.4% at the December FOMC meeting to 2.1% today. The Eurozone economy is on the upswing, with the latest business surveys pointing to the fastest expansion of private sector activity in ten months. Business optimism rose to its highest level since the eve of Russia's invasion of Ukraine. The eurozone's economic recovery should continue, with growth forecasts for the first half of 2024 potentially revised upwards. The main risk is a rise in commodity prices, which could lead to a resurgence of inflation in European economies. European leading economic indicators are clearly picking up, but Europe’s still very attractive valuations suggest that a lot of negative news is still priced in. The probability of positive surprises could therefore increase as the European economies regain traction. The Swiss equity market could benefit from the recent interest rate cut by the Swiss National Bank and the weakening of the Swiss franc. These developments will help mitigate the headwinds faced by Swiss companies last year and contribute to positive earnings revisions.
Estimated 1Q24 y/y earnings growth rate for the S&P 500 is 3.6%, third straight quarter of y/y earnings growth
Portfolio Activity/ News
Many technical indicators have reached levels historically associated with tops, but the trend is still our friend as it remains clearly up. Investor optimism could continue into April, which is historically one of the strongest months of the year for the US equity market. We are therefore maintaining our overweight in equities, with a clear preference for European equities, to take advantage of the current macro and market momentum, although we have reduced this overweight somewhat. We have also made some adjustments to the composition of our equity exposure, increasing the allocation to a top-down strategy at the expense of strategies with a strong growth bias. Chinese equities were very oversold and the recent rally has helped a little, but market psychology is extremely bearish on Chinese equities, which can be interpreted as a contrarian signal for this market. We are maintaining our exposure to Chinese domestic equities. The Chinese A-shares are our main exposure to emerging markets in our portfolios. Our bond portfolio remains exposed to both investment grade and high yield credit as well as hard currency emerging market debt. We added to the latter in March. Although our interest rate sensitivity has increased, it remains lower than that of the main bond indices. We are keeping a close eye on the resistance level for US yields (4.35% for the 10-year yield), as a breach of this level could send a particularly negative signal to the markets.
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Newsletter | February 2024
S&P 500 reached a record high in January (4’931.09) for the first time since January 2022
10.79% THE PERFORMANCE OF CHINESE -A- ONSHORE
Investment perspective
In the US, the latest economic data showed that gross domestic product rose at a revised annualised rate of 3.2% in the fourth quarter, compared with a previous estimate of 3.3%. Between the beginning of January and the end of February there were even signs of a slight upturn in US economic activity. There have been mixed signals from the labour market and on the inflation front. The strength of the labour market and the renewed tensions on the inflation front clearly support the Federal Reserve's position. The main consequence of these robust figures is that they have removed any chance of a first cut before the June meeting. In Europe, the ECB left interest rates unchanged. After a period of optimism, with expectations of more than 100bps cut as early as April, market expectations have adjusted to a 90-95bps cut from June, in line with the Fed. In Japan, the government reported that the economy contracted at an annual rate of 0.4% between October and December, although it grew 1.9% for the year, but contracted 2.9% in July-September. The stronger core CPI pushed JGB yields higher and should be a warning sign that the $20 trillion global carry trade financed by shorting the JPY is likely nearing an end. The flash manufacturing PMI fell to 47.2 in February from 48.0 in January, signaling a ninth consecutive deterioration in operating conditions, the most since August 2020. US Treasuries were significantly weaker, with the 10-year US Treasury yield ending the month at 4.25%, while in Europe the 10-year Bund also ended the month higher at 2.41%, up from 2.02% at the end of December. US stock indices ended the month higher, closing above 5,000 for the first time on 9 February. Major technology companies were higher overall, helped by the continued momentum of Nvidia (+28.7% over the month). Europe was not left behind, with the main European index reaching a new all time high. As in 2023, the UK index lagged due to its exposure to mining, oil, and real estate. It should be noted that corporate earnings were better than expected, which should continue to support price rises. The dollar was again particularly strong against the yen and was flat against the euro. Gold closed down 0.6%, while oil was higher (up 3.2%).
Investment strategy
The broad consensus on the path of interest rates remains uncertain, but the market expects rates to move lower, with 100 bps of easing in the US this year starting in June. After the strong rally in markets into year-end, valuations across asset classes look somewhat stretched, for example spreads on the fixed income side as well as equity indices. Despite acknowledging stretched trailing PE multiples, many strategists have raised their annual target for the S&P 500. Driven by a handful of names, large cap EPS forecasts are trending higher, while small and mid cap index earnings continue to trend lower. Momentum and quality indices continue to outperform value year-to-date. This is true across and with asset classes especially the Nikkei, which has reached record levels and is one of the best performing equity indices in local currency terms so far this year. In the US, several technical records are being tested by the ongoing exuberance, including 16 positive weeks out of the last 18 - the best streak since 1971 - and a market rally (+24%) without a 2% decline in 20 years. Indicators suggest that, based on historical patterns, a correction may be overdue. For the first time since last summer, China's stock indices are trading above their 50-day moving average.
Emerging Market Sovereign Hard Currency HY was up by 2.10% in February, while IG was down by 0.61%
Portfolio Activity/ News
The correction in the rate cut expectations of the major central banks in the developed world is now more in line with the message they have been distilling for the past year. This rebalancing should underpin the credibility of central banks in their determination not to act too hastily at the risk of seeing inflation rise again. Against this backdrop, we believe it would be prudent to increase our bond weighting in order to increase the interest rate sensitivity of our portfolio. We have therefore initiated a position in long-dated government bonds to take advantage of the expected easing in long-term yields. At the same time, we are maintaining a large proportion of our bond portfolio in both investment grade and high yield corporate bonds. While remaining constructive on markets, we decided to continue taking partial profits on some of our global equity holdings. After this reduction, we remain overweight in equities, with a preference for Europe, China and US technology. We reiterate the value of alternative strategies, particularly trend strategies, in this environment of trend extension. We have therefore increased our positions in alternative trend strategies, which combine price and macro signals, and in our existing global macro strategy.
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