New rates, new rules

The global economy has turned a new page, with the Federal Reserve (Fed) finally cutting interest rates. Recession looks unlikely, and a soft landing remains in sight. The Fed has plenty of room to cut rates more to cushion growth before they reach a cruising level – one that neither stimulates nor stalls the economy.

The Fed has plenty of room to cut rates more to cushion growth before they reach a cruising level

Monetary easing should continue across most developed economies as inflation gradually falls. The Fed’s move has also given central banks in other regions more room for manoeuvre. That now includes China’s central bank, as the country launched a coordinated stimulus package in late September.

Overall, the global rate-cutting cycle is in full swing, and growth now looks to be settling around long-term levels. Of course, plenty of risks threaten this stabilisation. But, for now, the effects of these risks on the global economy seem contained.

A new era for central banks also means a fresh path ahead for investors.

Easing monetary policy and low recession risks should continue to support risk assets. Yet we also see reasons to tread carefully. Growth is slowing, geopolitical risks are elevated, and investors are facing a US presidential election unlike any other. After a strong run year-to-date, equity markets look more vulnerable to corrections.

After a strong run year-to-date, equity markets look more vulnerable to corrections

Rising earnings and solid margins should support stocks in the months ahead. But earnings expectations are no longer being revised higher, and company valuations are full. We therefore adopt a balanced global strategy when managing portfolios, and stay close to our strategic allocations to equities, bonds, and commodities including gold.

Within equities, we have narrowed our sector preferences to materials and energy. A return to more typical asset class correlations means bonds are playing a valuable diversification role in portfolios again. Here we prefer German Bunds and UK gilts over US Treasuries, hedging these investments against the portfolio’s reference currency, and European over US corporate bonds.

Bonds are playing a valuable diversification role in portfolios again

In currencies, we now adopt a neutral stance on the dollar, and prefer the Swiss franc and the Japanese yen.

As we start the final quarter of the year, market developments will also bring new opportunities, and we stay alert to these as we equip our portfolios for changing times.