Bumpy road ahead

Last month, we rated the probability of a bear market rally in the seasonally strong July as high. Indeed, both the equity markets and the bond indices were then able to make effective gains, thereby slightly mitigating the annual losses of a mixed portfolio.

Due to falling inflation rates and a weak economy, financial market participants in the USA are now expecting the Fed's first interest rate cuts in the first quarter of 2023 already. As a result, in particular the past winners and big losers of this year (e.g. Tesla, crypto, ARK ETF and Nasdaq) rebounded in July. We expect negative earnings revisions   to follow and downward pressure on equities is likely to increase again. We also remain underweight in commodities and corporate bonds, where no recession is priced in yet. We are maintaining our neutral stance regarding government bonds as yields are trapped between recession fears and continued high inflation rates. As has already been the case for the entire year, the liquidity and catastrophe bond allocation remains at an elevated level.

• We are closing our underweight in US equities at the expense of European and Canadian securities.
• The US market has a lower beta, a more robust economy, healthier consumption and a more stable housing market.
• US grwoth stocks have suffered from the sharp rise in interest rates, which is now likely to be over. A residual risk continues to be a further decline in valuations. The P/E ratio is meanwhile 17.5.

• China has problems of its own, of course: the zero-Covid policy, fragile housing market and regulatory concerns. However, many of these have already been priced in (P/E of 13.5 vs. 22 last year)
• Moreover, China does not have an inflation problem (CPI at 2.5% vs. 11.9% in Brazil, 12.5% in Chile and 8% in Mexico); its monetary policy is therefore also tremendously looser.
• Local governments have issued significantly more bonds for infrastructure investments and growth will improve. 

• The sharp rise in US real yields (from -1% to +0.5%) is hampering gold (-16% since March), with outflows from ETFs increasing.
• According to the historical correlation to real yields and the strong USD, gold ought to be listed much lower, so a geopolitical premium still exists.
• Gold is currently priced only slightly above the very important support level of USD 1680; we are currently neutrally positioned.

Multi-Assets Allocation

Investment tactics of the past months

July 2022: Peak in inflation is still to come

June 2022: A Quantum of Solace: The Return of the Yield

May 2022: Stay short in May, but don't go away!

April 2022: Equities - Headwind expected again after recovery rally 

March 2022: Developments in the East