Newsletter | May 2025
The IMF has cut its growth forecast for global economic growth this year to 2.8%, compared with 3.3% in January
25.3% PERFORMANCE OF GOLD SINCE THE BEGINNING OF THE YEAR
Investment perspective
April will be remembered as the month of tit-for-tat tariffs, with the dramatic announcement of reciprocal tariffs. Indeed, on 2 April, the US President announced the details of these reciprocal tariffs. Although widely expected, they came as a surprise because of their magnitude (10% base tariff from 5 April + additional tariff equal to half the ratio of the US bilateral trade deficit divided by US imports from 9 April). The announcement of 34% reciprocal tariffs on Chinese imports prompted China to impose 34% tariffs on US goods on 4 April. On 9 April, Trump hit China with an additional 85% levy on all imports, bringing the total to 104%. On the same day, China announced retaliatory tariffs of 84% on imports of US goods, further escalating the trade war between the world's two largest economies. On the same day, Trump raised tariffs on Chinese imports to at least 145% before announcing a 90-day pause on "reciprocal" tariffs, except for China. On 11 April, China raised its retaliatory tariffs on US imports to 125%. These punitive tariffs are undoubtedly a bargaining chip in negotiations with US trading partners, and the tariffs ultimately imposed after negotiations may be less severe. However, the risk of escalation will ultimately weigh on economic growth and reignite fears of a resurgence in inflation. This recessionary scenario (more than 60% probability at Goldman Sachs) of tariffs has triggered a sharp downturn in financial markets, with the US dollar being a large casualty. Perhaps in response to the market turmoil caused by the growing risk of recession and a sharp tightening of financial conditions, the US President has announced a 90-day pause on reciprocal tariffs. The delay in implementation and the possibility of a more favourable negotiated agreement than the announced tariffs allowed markets to breathe a sigh of relief. This return to relative calm after an unprecedented shock allowed the main stock market indices to record a minimal decline of 0.5% for US equities in US dollar terms, with the Magnificent Seven even rising 0.7% over the month, and European equities in euro terms falling 0.8%. The cut in global growth forecasts led to a sharp fall in the oil price, which fell 18.6% over the month. In contrast to credit and equity markets, the US dollar did not follow this rally and fell 4.5% against the euro in April, following an already 4.1% decline in March.
Investment strategy
After a month of extreme uncertainty, as evidenced by the rise in volatility indices across all asset classes, the month ended on a note of optimism thanks to the de-escalation announcements from the White House. The disruption caused by Trump's tariff hikes has reduced the potential for American exceptionalism to continue. The attempt to reshape global trade by imposing tariffs on all US imports has increased the risk of a global economic slowdown and the perceived risk of a US recession. Economists have cut their global growth forecasts, with the median down to 2.7% from 3.0% in January. This turmoil, caused by Trump's policies but also by uncertainty about future relations with an unpredictable administration, sent markets into a sharp correction. In total, the Magnificent Seven lost $2.3 trillion in value since 21 January, the day after Donald Trump's inauguration, with $1 trillion lost on inauguration day alone. Are we witnessing a bear-market rally (usually fast and sharp), or the start of a new secular cycle following a temporary shock, in this case tariffs, fuelled by a prolonged artificial intelligence cycle? This is not a trivial question, as a pause in trade tensions has contributed to the recent rally in risk assets. A shift away from the original tariffs could indeed prolong the rally, although the economic impact will be felt in upcoming economic data. Since 1950, the US equity market has experienced 19 peakto-trough drawdowns of more than 15%. The current correction is mild compared to previous recessionary periods.
“Analysts Are Calling for Earnings Growth Rates of 6.4%, 8.8%, and 8.3% for Q2 2005 to Q4 2025"
Portfolio Activity/ News
After intense activity in the first quarter, which led us to substantially reduce equity and dollar exposure in our portfolios, we decided to leave our positioning unchanged in April. We remain neutral on equities, with a bias towards European assets at the expense of the US. This positioning has helped our portfolios to mitigate the impact of the sharp fall in the US currency, while capturing the strong outperformance of European assets since the beginning of the year. It should be noted that we may consider reducing this directional bias if a more constructive return on large US technology companies is confirmed. We have started this rotation towards more technology-focused content with a more global positioning, which proved profitable during the rally in the second half of April. We are also encouraged by the results and the constructive commentary accompanying the earnings releases, confirming continued investment and demand in the artificial intelligence sector. We have maintained our bond convictions, namely a preference for European duration, a clear path to the front end of the curve and a broad credit exposure across all sectors and geographies. In this uncertain environment, we believe it is essential to seek resilience through a large, uncorrelated and high-performing alternative allocation. While volatility has reached high levels, so too has the dispersion of performance across alternative segments. Our position selection and sizing have been prudent and have been rewarded in terms of performance. We are maintaining our positions and plan to increase the weighting of this type of strategy through new additions. We recognise the strategic stabilising role of gold but acknowledge that a return to a risk-on market environment and a correction cannot be ruled out, which would offer more attractive entry levels.
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Newsletter | April 2025
The Swiss National Bank cuts its key interest rate by 25 basis points to 0.25 per cent in March
11.4% PERFORMANCE OF COPPER
Investment perspective
We have an almost unanimous consensus that recent soft data, such as surveys, are pointing to a likely deterioration in US growth, while the reported growth and inflation releases have been in line with expectations at the start of the year. What will happen if the figures confirm the negative impact of the new US administration's economic policies on both growth and inflation ? Even if many economists have already revised their forecasts for US growth, indicators following economic surprises do not seem to show any major deterioration. However, we are back in a world where many forecasters are predicting a US recession within two years with a probability of more than 30%. While political uncertainty reigns in the United States, from tariffs to possible major cuts in government spending, the rest of the world, and Europe in particular, is showing renewed optimism. This more constructive attitude towards economies outside the United States stems from an easier reading of economic policies that could have lasting structural effects on growth. The lack of investments has for years undermined the attractiveness and competitiveness of the eurozone. The announcement of substantial spending plans to address, among other things, the vulnerability of supply sources and defence needs is undeniably encouraging investors, as the rally in European markets and the euro seems to confirm. We believe that we are on the verge of significant flows into European assets, due to the under-representation of the zone in portfolios, but above all sustainable because of the structural measures taken by the European authorities in relation to assets outside the United States. Certainly, the movements since the beginning of the year have opened investors' eyes to the degree of concentration of their portfolio due to the dominance of an ever-smaller number of significant contributors to performance and the imperative need to increase their exposure outside the US. As at the end of the 1990s, so-called ‘value’ assets such as Europe may remain in the penalty box for longer than anticipated but can prove to be very profitable in the event of a lasting turnaround, as US equities have been since the great financial crisis of 2008-2009.
Investment strategy
The next few days will be crucial, with important announcements on tariffs that will provide more clarity on the real impact on growth and inflation. These clarifications can help provide a clearer picture of the new policy framework, which markets, consumers and producers desperately need in order to operate with confidence. As a discounting mechanism, financial markets have already priced in these uncertainties and are now awaiting the announcements with some trepidation to understand the real impact of these new tariffs. In this context, economic growth has been revised downwards and is now expected to be around 1.5%, compared with over 2% at the end of 2024. Despite their one-off effect, the tariffs and their countermeasures will push up consumer prices by almost 3.5% year-on-year. Similarly, downward revisions to US economic growth and S&P 500 earnings growth estimates have been swift. Indeed, higher tariffs will not only hurt growth, but also lead to a new surge in inflation, which could negatively impact the earnings potential of many companies. Earnings growth forecasts for the S&P 500 have been revised sharply downwards from over 10%, with the consensus now expecting low single-digit earnings growth in 2025. The US equity market is the most exposed to the deteriorating economic environment, with the spectre of recession looming. Historically, US equities have fallen around 25% from their peak during recessions.
“35% Probability That the US Economy Enters a Recession During the Next 12 Months” (GS)
Portfolio Activity/ News
The US administration's flip-flops on economic policy, in particular tariffs, influenced our portfolio activity, which was higher than usual. We started 2025 with an equity bias. However, in the first half of January, we considered it appropriate to reduce our risk for the first time and then to reduce the equity allocation in several steps to an underweight position by mid-March, compared to a near maximum overweight position at the end of December 2024. At the same time, we rotated more towards European equities and away from US equities due to their high valuation, strong performance and growing uncertainties about American exceptionalism. This proved productive as European equities (+5.9% in euro terms) outperformed US equities (-4.6% in US dollar terms). In addition, the euro gained 4.5% against the US dollar following the announcement of a fiscal turnaround in Germany. In euro terms, the difference between the two markets in the first quarter was 15%. After a sharp correction of more than 10% in 22 days (the 6th fastest correction in the last 75 years), while conscious of the risks associated with the tariff announcements of 2 April, we returned our equity allocation to neutral and strengthened our bond allocation by increasing our exposure to emerging market corporates. We continue to favour credit (investment grade and high yield) and European bonds (interest rate sensitivity around 6 years) due to their solid fundamentals, better future growth prospects and attractive carry. In these uncertain times, an allocation to so-called alternative strategies can have a crucial stabilising and risk-reducing effect. We currently favour macro and alternative trend-following strategies.
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Newsletter | March 2025
The ECB cuts interest rates to 2.5% as inflation in Europe is under control
-8.7% PERFORMANCE OF THE MAGNIFICENT SEVEN
Investment perspective
The outstanding feature of the beginning of this year has undoubtedly been the remarkable performance of European equities compared with US equities. The former are up 10.3% in euro terms, while the latter are effectively flat. Investors had emphasised American exceptionalism as a source of explanation for the incredible returns of US equities, leading to a degree of concentration that many considered to be a potentially unsustainable trend. The rotation in market leadership coincided with a shift in focus from expensive global technology names, which are by nature more global and potentially negatively affected by a full-blown trade war, to cheaper and beaten-down sectors, regions and stocks such as Europe. At a macro level, the new US tariff policy of, for example, 25% on Canadian and Mexican imports and 10% on Chinese imports has kept political and economic commentators on their toes. Not only does it mark a clear break with current doctrine, but it is also a major source of uncertainty that could, like Covid, cause significant damage to supply chains. The announcement of the suspension of US military aid to Ukraine, following the debacle of the White House meeting and the failure to sign an agreement on mining resources, has provoked a wave of indignation from the major European countries, both in style and in substance. The breakdown in transatlantic trust could serve as a signal to Europe. Moreover, it seems that Europe is ready to take up the challenge of a US retreat in the Ukrainian conflict and to reaffirm its unwavering support for the Ukrainian cause. The outcome of the German elections is a source of optimism. Indeed, we could soon see announcements of a major investment plan and an easing of budgetary constraints. These investments are crucial for Europe's competitiveness and should provide a tailwind for European growth. In the bond markets, the favourable trend in credit continued, with a slight easing in US 10-year rates. In commodities, oil prices fell by around 3.8% in WTI terms, while gold rose by 2.1% in US dollar terms. The latter remained stable against the major European currencies over the month.
Investment strategy
Merz's conservatives won Germany's election by a comfortable margin over rival parties. The other big winner was the far-right AfD, with a record 20.8% of the vote. The coalition agreement with the Social Democrats was followed by the announcement of an unprecedented fiscal plan that exempts defence spending from the debt brake and includes a €500bn fund for infrastructure spending over the next 10 years. While the proposal still needs to be passed by parliament later this month, the historic U-turn on public spending has been felt in financial markets, sending the euro and government borrowing costs higher. This radical departure from the obsession with debt sustainability, coupled with a clearer ECB policy thanks to moderating inflation and the prospect, albeit still distant, of a ceasefire in Ukraine, continues to support European equities. The publication of weak US economic figures and a deterioration in consumer confidence, linked to the growing uncertainties associated with the decisions of the new Republican administration, have revived fears in the markets, whether legitimate or not, about economic growth. These fears about the future health of the US economy have led to a reduction in risk appetite and a flight to quality that has allowed 10-year US government bonds to fall from 4.8% in mid-January to below 4.30% despite persistent inflation.
US Commerce Secretary Lutnick Hints at Possible Tariff Relief After Market Sell-Off
Portfolio Activity/ News
After convergence, we are entering an era of divergence and disruption in both form and substance. While nothing can be taken for granted, increased uncertainty will continue to weigh on markets and be a source of significant volatility, both up and down. Given the increased political uncertainty across the Atlantic, but also the persistence of high geopolitical tensions, we have continued to reduce our equity exposure. We continue to favour European equities. However, we are aware that the rise in European indices has been rapid and that a pause or a slight correction would be welcome to calmly consider the continuation of the upward trend. We are staying away from Japanese equities and maintaining a neutral stance on emerging markets. Reducing our exposure to US equities has also allowed us to reduce our exposure to the US dollar. As a reminder, we had more than 35% exposure to the US currency in the fourth quarter of 2024 and have gradually lowered it to around 20%. To take advantage of potential bouts of volatility, we are holding the proceeds of our equity sales in cash to mitigate the impact of any declines, but also to take advantage of any exaggerations. These reductions have brought our equity exposure to an underweight position. At the same time, we have increased our allocation to liquid alternative strategies to add resilience to our portfolios. We remain constructive on European yields, although we are not particularly pleased with the recent movement in German yields. We maintain our preference for European credit, where carry remains attractive, and fundamentals are strong.
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Newsletter | February 2025
As largely expected, the ECB cut rates by 25 basis points in January
+8.4% PERFORMANCE OF THE SWISS EQUITY INDEX
Investment perspective
The start of President Trump's second term was undoubtedly at the forefront of investors' minds, particularly his stance and actions on tariffs. The uncertainty did not prevent financial markets from posting significant gains in January, both in equity and credit markets, led by high yield. Bond yields rose to their highest level since May 2024 following the release of the employment data. Investors were again concerned that the strong US economy would eventually translate into inflationary pressures, leading to an upward revision of inflation expectations. As a result, the 10-year breakeven rate, a measure of expected future inflation, has risen from a low of 2.0% in early September last year to 2.4% at the end of January. As widely expected, the Fed kept rates on hold. For the rest of the year, the market is now pricing in only one rate cut in 2025, significantly less than a few months ago. In contrast, the European Central Bank (ECB) cut rates for the fifth time, paving the way for further cuts in 2025. Finally, the Bank of Japan (BoJ) raised its key interest rate to 0.5%, the highest level in 17 years. For many investors, the surprise at the start of the year was undoubtedly the performance of European equities, which had lagged badly until early December due to the region's sluggish growth momentum and trade tensions. As a result, the main European equity index rose by 6.5%, while the Swiss equity market stood out with a gain of 8.5% in the first month of the year. The US market closed broadly higher, but there was a lot of excitement after DeepSeek unveiled a new version of its large language model, reportedly developed at a fraction of the cost of the leading US models, which appears to be much more economical to run. The US dollar fluctuated on the new administration's tariff announcements but ended the month flat against the euro and Swiss franc. Gold and silver posted strong gains and remain close to all-time highs as Trump's trade tariffs continue to fuel fears of a global trade war and its impact on US inflation, supporting the safe-haven price of gold.
Investment strategy
As we feared following Donald Trump's re-election to the US presidency, since he was sworn in for this second term, there has been a flood of executive orders. Although he initially appeared to have temporarily abandoned tariffs, we were reminded of his campaign promises in this area at the end of January. The announcement of tariffs of 25% on products imported from Mexico and Canada and 10% on those from China (effective 4 February) was immediately followed by retaliation, leading to a temporary suspension until early March. Announcements of possible measures against the European Union are also expected. According to Goldman Sachs, a 1 percentage point increase in the effective tariff rate raises the core PCE price level by 0.1%, implying a one-off boost to core PCE inflation of 0.5% y/y. If the tariffs on Canadian and Mexican imports are implemented as announced, we should see inflation that could exceed 3.0%. The consequences of a reacceleration in inflation could mean a premature end to US rate cuts and a major turning point for markets, especially at current valuations. Against this backdrop, we have taken a more cautious approach to our asset allocation. Although we have reduced our equity allocation, we are maintaining our preference for corporate bonds and favouring European government bonds to take advantage of monetary policy divergences.
Trump Announced Tariffs of 25% on Imports from Mexico and Canada, and 10% on Chinese Imports
Portfolio Activity/ News
Our positioning at the beginning of the year was very clearly risk-on, with a broad allocation to equity markets and high yield bonds. We have recently reduced our equity allocation but maintained our credit stance and added long-dated eurozone government bonds. Our expectation of an acceleration in the central bank's accommodative monetary policy confirms our belief in the potential for added value in this segment. On the other hand, we remain much more cautious on US yields, which are still likely to rise due to uncertainties on the inflation front. Having benefited greatly from our strong allocation to US equities, we began to move back into European equity markets in January, including Switzerland for clients thinking in these currencies. This move proved very profitable in January, given the excellent performance of these markets. In a scenario of lower European interest rates, we look at interest rate-sensitive assets such as the MDAX (the 50 largest companies after the DAX). Indeed, the pro-business policies proposed by the CDU, currently leading in the polls, would stimulate investment and could mark a turning point for Europe. Within US equities, we took profits on our Value Exposure, maintained a market-consistent weighting in technology and increased our exposure to small and mid-caps, which should benefit fully from the Republicans' pro-budget policies. We took advantage of the sharp fluctuations in the US dollar during the month to significantly reduce our position. Following these changes, we are still slightly overweight in US dollars. We reduced our exposure to Global Macro before exiting the segment altogether to build up a liquidity cushion that could prove useful in the event of excessive volatility.
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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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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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