Higher for longer?

The weak seasonality in September was once again confirmed and equity markets lost ground. Following the peak in July, the annual performance now stands at around 10% (MSCI World, calculated in CHF). In any case, it is not the worries about growth that are negative drivers, but rather further increasing bond returns given the narrative of "higher for longer" currently espoused by the central banks. In view of this, any interest rate cuts in the coming year are likely to be significantly lower than previously announced.

Bond investors are also worried about the sharp increase in the oil price, now up to USD 95 a barrel, which is again stoking inflation. However, the clearly positive fiscal stimulus of the United States (8.5% primary deficit), which is as high as during the financial crisis of 2008, is now set to retreat, alleviating the upward pressure on yields.

Keeping up the defence

The prospect of longer-lasting high interest rates increases the risk of a recession. In turn, this puts pressure on equities. In this difficult environment, we remain defensive, favouring money market bonds, government bonds, catastrophe bonds and exchange-traded Swiss real estate funds over equities and corporate bonds. Although in currencies we continue to favour the US dollar against the Swiss franc, we are currently recouping some of the profit (+5% since the beginning of August).

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

• Fundamentally, the outlook for gold is clear: a stronger USD, rising real yields (> 2%) and low volatility (VIX < 20) should lead to significantly lower gold prices. 
• Nevertheless, the price of gold remains stubborn and, if anything, is moving sideways. Other forces currently seem to dominate (e.g. central bank buying).
• We are therefore ending our underweight. 

• In the UK, yields have remained flat over the past three months compared to the rest of the world (US +83bp, Canada +72bp, Germany +50bp, Australia +45bp).
• However, the pound sterling is now vulnerable: the economy is weak, inflation is declining, the Bank of England has reached the end of the interest rate cycle, and speculative long positions are very high.
• We are therefore taking profits on gilts and switching to Australian government bonds, which have a similar yield to maturity (4.4%), but with the AUD a more attractive and cheaper currency.

• US bond yields have risen (> 4.5%), a high level of supply combined with selling pressure from Japan and the BRICS countries and a high oil price causing uncertainty in the short term.
• We continue to see lower returns for medium-term bonds and are therefore holding longer-term positions in the US. However, we are slightly reducing our position in short-term bonds and therefore reducing our strong US dollar overweight.
• We are modestly increasing our position on the equity side due to the comparatively large correction in highly profitable megacaps. Welcome back to our portfolio, Nasdaq!

Tactical Asset Allocation in October 2023