investment insights
Positioning for a new rate cycle
Will a bumpier path to disinflation derail policy expectations, and markets?
Global growth is starting to look more encouraging. Recession risks remain contained.
Meanwhile, inflation has fallen impressively since mid-2023.
After underestimating the strength of inflation in recent years, and with today’s resilient growth, major central banks are being cautious about shifting monetary policy.
But inflation is moving close enough to target for both the US and Europe to justify rate cuts this year, probably starting in June.
In Switzerland, the rate cutting cycle has already begun.
Meanwhile China’s disinflation is helping to push down goods prices worldwide, even though it will weigh on the country’s outlook.
What could go wrong? Inflation might surge again. Besides, geopolitics, US elections, threats to tech sector returns, credit events and public debt sustainability must be carefully monitored.
So, what does this mean for markets, and our portfolio positioning?
The earnings season confirmed our tactical decision to raise exposure to US stocks earlier this year, and last year’s decision to increase them as part of our core strategic portfolio allocations.
In recent weeks, performance has started to broaden across stocks and regions.
It will need to keep doing so to drive markets higher.
Some consolidation from current levels would be healthy and could present an opportunity to add exposure.
In fixed income, we maintain our preference for high-grade bonds, which we expect to outperform cash in the coming 12 months.
With the start of the rate-cutting cycle in Switzerland, we expect yield curves to normalise, and it is therefore time to start locking-in high bond yields and extending duration.
Gold has seen a remarkable run in recent weeks, benefitting from expectations that real rates will fall, amid continued central bank buying for reserve diversification purposes.
We keep gold at strategic levels and expect prices to rise moderately a year from now.
In currencies, we keep a dollar overweight bias, given its yield advantage, and a backdrop of solid US and soft global growth.
From a long-term perspective, the changing investment landscape means that alternative investments and private assets in particular can play an important role in portfolio performance and diversification and warrant a strategic allocation for eligible investors.
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