Stay ahead of the curve with our experts’ breakdown of this month’s market shifts and the insights shaping our portfolio positioning.
Fast reading:
- World equities have exhibited strong momentum, up almost 5% in euro terms in the last month, thanks to better economic data and confirmation that we are in interest rate-cutting cycles across the globe.
- Investors also continue to keep a close eye on US election polls. US credit in particular rallied last week as the prospect of a Trump victory came increasingly to the fore.
- Alongside our near-benchmark weight equity exposure, our portfolios are typically running lower exposure to long-maturity bonds than the benchmark.
Bernard Swords, Chief Investment Officer
A good month for equity markets
It is a month since the last edition of Portfolio Perspectives and world equities have exhibited strong momentum, up almost 5% in euro terms. Better economic data and confirmation that we are in interest rate-cutting cycles across the globe (see details below) were major positives during the month. Along with this, China’s Central Bank announced a slew of measures to support the economy. It was not all good news, tensions in the Middle East rose again.
Worries about the US economy receded further over the last month as data relating to US consumption and the labour market improved. Indeed, the US economic growth rate has rebounded close to trend levels. The euro area and China continued to struggle with retail sales growth slowing and manufacturing sectors in contraction. However, the negative impact was offset by the Chinese authorities implementing a number of measures to support the economy and, in particular, the beleaguered property sector. These measures included cuts to interest rates, easing purchase requirements for housing and reducing the reserve ratio for the banking system allowing banks to increase their level of lending.
Geo-political risks rose further as Iran launched a missile strike on Israel. This is a human tragedy with continuing loss of life and hopefully it can be resolved without further escalation. For financial markets, the risk is a spike in the oil prices which so far has not happened.
The last month has been a good one for equity markets and for good reason. Authorities across the globe are implementing policies to support economic growth. As a result, the global economy is expected to grow close to the trend level and interest rates will be coming down. This is a powerful combination for equity markets. There are risks emanating for the Middle East and share prices have moved up, so some modest caution is still required. The US election is upon us and the outcome is likely to be neutral to slightly positive for equities, in particular, US equities. We have been moving towards a neutral position in equities across our models and we would use any weakness to add further.
Moyah Flanagan, Fixed Income Strategist
ECB’s first back-to-back rate cut alludes to euro area weakness
Although markets continue to advance, therein lies high levels of volatility as geopolitical tensions persist, the US election is upon us, and central banks grapple with the timing and delivery of further monetary policy easing. One thing for certain was the European Central Bank’s (ECB’s) latest 25 basis-point cut, bringing the policy rate down from 3.50% to 3.25%. With forward-looking indicators across Europe looking relatively weak, there may be significantly more monetary policy easing ahead. In terms of bond yields’ reaction to the cut, euro area yields had more or less fully priced in the move but still marginally declined following the announcement.
Elsewhere, the US Federal Reserve Bank has had several batches of upbeat US data to digest ahead of its next meeting in early November. With the September Employment Report and Consumer Price Index data surprising to the upside, it appears the US economy is proving resilient. As such, US markets have begun to price out the likelihood of back-to-back rate cuts, predicting a slower and steadier cutting trajectory than their euro area counterpart. US 10-year Treasury yields have sold off on the back of this apparent strength, climbing above 4.20%.
Investors also continue to keep a close eye on US election polls. US credit in particular rallied last week as the prospect of a Trump victory came increasingly to the fore. US investment grade spreads closed at their tightest level since 2005, while similar euro area spreads closed at tight levels not seen since 2021. Following our October Asset Allocation meeting, the investment committee remains comfortable with our current positioning, reflecting a corporate bond overweight and an underweight position in government bonds. We remain slightly underweight duration relative to the Euro Aggregate bond index but are constructive in terms of adding duration as central bank rate cutting trajectories unfold. From a regional perspective, we still maintain a preference to Europe where volatility from swings in rate cut expectations appear to be more subdued.
Joe Prendergast, Head of Investment Strategy
Portfolio positioning: Staying exposed to equity but avoiding long bonds
The strong upward trend of equity markets over the past year has provided portfolios with impressive positive returns in 2024 to date. As of the end of September, the All-World total return index was up nearly 18% in euro terms, and it has extended further into October. But it’s not all been easy – there was a sharp, near 10% correction in early August and we should not forget the recent rally followed a prolonged neutral phase for World equities from end 2021 to mid-2023.
In essence, equities are doing what they are supposed to do – providing an appealing return but at the cost of some considerable volatility from time to time. And always with the risk that the point of entry is not optimal. They are also logically reflecting the sequential positive economic surprises delivered by the US economy in particular, which is translating into a steady flow of positive earnings surprises and a cycle of optimism.
From a portfolio construction perspective, holding near-benchmark equity weights has been rewarding in this environment and remains our favoured approach. Among sectors, we still feel strongly about keeping a somewhat defensive bias, tilting in favour of sectors that have the highest structural growth visibility, notably Industrials, Healthcare and Information Technology.
Even with US political risk elevated in the near term, there appears to be little immediate threat to growth from either candidate – and the risks of a Trump presidency in the form of threatened tariffs may be offset by sustained fiscal expenditure, corporate tax cuts and the restrictions of the US legislature. What is perhaps more worrying is that there is potentially too much emphasis on growth, too much pro-cyclical stimulus, and not enough on stability and debt sustainability. While inflation is moderate that may seem no major threat, but if inflation were to be less well-behaved or the market simply shifts to worry more about fiscal sustainability, the story could quickly change. If so, the bond market may initially be the focus. Yields have already switched to a visible uptrend since mid-September. So, alongside our near-benchmark weight equity exposure, our portfolios are typically running lower exposure to long maturity bonds than the benchmark.
