Peak Fed reached – what now?
On 3 May, the US Federal Reserve completed what is probably the last interest rate hike in this cycle (to 5.25%), putting us at peak Fed. Will there be a rapid descent? We don't think so and are not expecting interest rate cuts until the beginning of 2024. Why? Because of the continued high core rate of inflation.
Government bonds are perfectly suited right now for the picnic on this plateau, as bond prices have always risen after the final interest rate hike in the past. As we continue to anticipate a recession in the USA in the second half of the year and then also in Europe with a lag, yields are likely to fall further despite the interest rate curve already being inverted. We are therefore once again increasing our overweight in government bonds, while remaining underweight in corporates.
Global equities are still not such a good bet
Valuations have been all over the place. Stock markets have been bobbing along without direction since the beginning of April, but with strong shifts in the equity structure. Since February, the equal-weight S&P 500 has lost around 6%, while the Nasdaq 100 has gained 13%. Market breadth has been miserable: equity indices have been propped up almost by US megacaps alone. We remain slightly underweight in equities and continue to favour cat bonds and Swiss real estate.
- Gold has failed to reach its all-time high of around USD 2,050 for the third time in a row and dropped below the magic barrier of USD 2,000 again – despite the US debt crisis.
- According to its historically high correlation with US real yields, gold should actually be trading much lower, so the downside is considerable.
- We are going into a slight underweight and making the timing dependent on how the US debt crisis unfolds.
- The UK was recently hit particularly hard by the rise in interest rates (+50 bp in 3 months vs. -23 bp in the USA). The 10-year Gilts yield is at a high 4.2%.
- As core inflation continues to climb (currently to 6.8%), the Bank of England is being called upon to push interest rates higher. But the economy is already crumbling and the interest rate curve is expected to flatten.
- As pound sterling builds momentum, we will buy UK government bonds.
- In July 2021, we purchased a European dividend fund, and this has achieved an outperformance of 9% vs MSCI World.
- We have dialled back our overweight in European equities this year and are now down to a neutral position.
- The all-time highs on the equity market weren't breached and economic momentum is declining markedly.
Tactical Asset Allocation June 2023
