Global growth weakness is likely to continue well into autumn, but the US economy has shown remarkable resilience. The stabilisation of the macroeconomic environment has led us to increase the global equity allocation to “Neutral”. On a tactical basis, we are starting to take profits in gold and downgrade the precious metal to “Neutral”.
Summer is living up to its name, with meteorologists reporting record temperatures in many parts of the world. However, capital markets are barely reflecting the heat. The volatility index of the S&P 500, the VIX, has fallen to its lowest level in three years. Equity investor sentiment has brightened slightly, but we are still a long way from the euphoria of the late 1990s.
The coming weeks will shed light on two key factors currently causing uncertainty in financial markets. First, how far along are the Federal Reserve (Fed) and the European Central Bank (ECB) in their respective monetary tightening cycles? We continue to believe that we are nearing the end and that 80% to 90% of the rate hikes have already taken place. Second, how have companies adjusted to the macroeconomic environment characterised by weak growth and increased price pressure? The outlook for the next few quarters will be crucial, and capital markets are already giving advance praise.
Artificial intelligence (AI) is currently driving the markets and we are convinced of the long-term potential of the investment story. However, the price fireworks of recent weeks have taken us by surprise. In some areas, there is a sense of euphoria and investors are feeling the pressure to be in the game at all costs. This is known as “FOMO”, meaning investors are afraid of missing out. Regular rebalancing of positions and active risk management are key success factors. AI is currently a prime example of this, but risk management should be applied to all sectors and industries in the current complex market environment.
The further decline in inflation and the resulting improvement in the growth-inflation mix have led us to increase our tactical position in global equities to “Neutral”, having already decreased our underweight in June. At the same time, we have reduced bonds and alternatives in a multi-asset portfolio. Despite this slight shift in allocation, the focus for the second half of the year is broadly unchanged - selection remains important.
Global growth weakness will likely continue well into autumn. Despite recessionary expectations the US economy has shown remarkable resilience. However, growth continues to slow amid weak consumption and contracting investment, and most analysts expect flat GDP over the second half of 2023. Sentiment indicators suggest more pessimism, with manufacturing and consumer confidence at long-term lows. The likelihood of a soft landing has nevertheless increased, with a controlled slowdown and gradual easing of demand and inflation pressures being our base case.
After an initial increase in the equity allocation last month, the stabilisation of the macroeconomic environment has prompted us to take a further step and increase the global equity allocation to “Neutral”. This follows after having upgraded Europe and emerging markets on a regional level, as well as energy, materials, technology, consumer discretionary and consumer staples on a sector level in recent months. The increase in equities is financed by reducing bonds and alternative assets from “Overweight” to “Neutral”.
While the current second quarter earnings season is important for investors, we believe that the outlook for the second half of the year and a first look at 2024 are crucial. Within the equity allocation, we maintain our regional pecking order of emerging markets, Europe and the US. Our preferred sectors are energy and healthcare, and we are overweight in consumer staples and materials. Despite regional and sector preferences, stock selection remains the most important factor for success.
Our preferences in bonds have not changed since last month. We continue to favour government bonds and corporate bonds with investment grade credit rating, while we remain cautious with regard to high yield bonds. With the yield curve still strongly inverted, we consider yields at the short end to be attractive. In order to keep credit risks low, we prefer to be positioned in short-term corporate bonds, while we favour longer maturities in government bonds. Overall, we aim for an average duration slightly above the benchmark. One of the reasons for this is to avoid building up additional credit risks in a weakening economic environment.
We project that the Swiss franc is set to oscillate within a stable range or potentially strengthen slightly against the US dollar in the near future, supported by various factors. The Swiss National Bank’s (SNB) monetary policy stance over the last few months, coupled with robust fundamentals in Switzerland, contributes to this positive outlook. Additionally, technical analysis indicates favourable price momentum. With respect to positioning, the shift towards favouring the Swiss franc over the US dollar and hence the unwinding of short positions of asset managers could amplify the upside potential of the Swiss currency as the year progresses. Overall, these factors point towards a sideways to slightly stronger performance for the Swiss franc.
On a tactical basis, we are starting to take profits in gold and downgrade the precious metal to “Neutral”. With this tactical adjustment, alternative assets are reduced from “Overweight” to “Neutral”. However, our medium- to long-term view on gold remains very positive. This is also reflected in our strategic asset allocation in a multi-asset portfolio, where we doubled the gold allocation from 2% to 4% in the spring.