Really "higher for longer"?

After the stock markets had risen inexorably in the first quarter, momentum slowed in April due to renewed inflation concerns. The last three US inflation figures all surprised to the upside and core inflation remains at a high 3.8%. As a result, hopes of interest rate cuts have also receded significantly and the US Federal Reserve is currently expected to cut interest rates less than twice this year.

Bonds catch up with equities

Due to the renewed rise in bond yields (ten-year US government bonds are trading above 4.7%), the equity risk premium in the US is now close to 0%. On the positive side, the correction has released some pressure and our sentiment indicators have calmed down somewhat. We are therefore currently holding a neutral equity allocation, which was achieved in the middle of the month by reducing momentum equities. We favour emerging markets, which were finally able to interrupt their underperformance in April.

Despite geopolitical risks in the Middle East and the associated threat of a rise in oil prices, we believe that the rise in yields is already well advanced and that a countermovement is becoming more likely. We also believe that inflation figures will surprise to the downside again in the coming months. Based on these premises, we are extending our duration, which has been short to date.

In this respect: "Higher for longer"? In the medium term yes, but not in the short term.

Global government bonds on the cards, profit-taking in gold

The price upside (or decline in yields on ten-year government bonds to 3.5%) appears to us to be greater than the downside (rise in yields on ten-year government bonds to 5%). We are therefore closing our underweight in bonds. Within bonds, we remain heavily underweight in corporate bonds and expensive Swiss bonds, while overweighting global government bonds. In alternative investments, we have already closed our overweight in gold during the month at around USD 2,330.

How do we currently assess the financial markets and how are we positioned?

• Yields on European government bonds (DE 2.6%, FR 3.1%, IT 4.0%) remain massively higher than those on Swiss bonds (0.7%).
• In contrast to the USA, inflation rates in the eurozone (DE 2.2%, FR 2.3%) are already very close to the ECB's inflation target of 2%, while the economy is significantly weaker and the ECB is too restrictive.
• The ECB is likely to begin its cycle of interest rate cuts in the summer, thereby pre-empting the Fed. We are therefore buying euro government bonds and hedging the currency risk for investors with non-euro reference currency.
   

• UK equities underperformed by 14% in the equity rally from November to March, making them even cheaper in relative terms (P/E ratio 11 vs. 18 for the world). The sector mix with many cyclical value stocks did not help.
• Now the tide seems to be turning, materials and energy are benefiting from high commodity prices and financials from higher interest rates, the price momentum has turned.
• The inflation rate in the UK is likely to fall below 2% in the coming months due to base effects, paving the way for interest rate cuts by the BoE, which is why we are buying UK equities and hedging the currency risk.

• The Swiss franc has depreciated sharply (-11% vs. USD, -8% vs. GBP, -7% vs. EUR), which is also attributable to the surprising interest rate cut by the SNB.
• Market expectations of the SNB are sporty (two more rate cuts this year), and the relative pricing compared to the Fed now seems exaggerated to us.
• There are now important resistance levels against the USD in particular (USD/CHF 0.92) and the CHF is heavily oversold (RSI at 30); we also see parity as the limit of depreciation against the EUR.
• We do not see a turnaround in the structural appreciation of the Swiss franc and are moving into a tactical overweight position; the Australian dollar and the Norwegian krone also remain favoured.

Tactical Asset Allocation in May 2024