A major change of course is taking place, and policy normalisation is now out-dated. In light of the potential slump in international trade and sharp decline in inflationary expectations, the Fed and the ECB have already announced rate cuts in the second half of the year.

Central bankers – still the masters of the world – are now firmly back in the spotlight. The current targets of their dovish monetary-policy are lacklustre international trade, the drop in inflation expectations and the tensions between the USA and China, and the main beneficiaries have been the stock markets.

Central bankers have been having a tough time lately. After the 2008 crisis, they were considered almost like heroes for having saved the financial
system. But now they have come under a lot of criticism in many countries. Some people have accused them of being sorcerers’ apprentices who continue to experiment with unconventional methods that are a far cry from the monetary doctrine in place since the Second World War. Others think they haven’t done enough.

For Donald Trump, the Fed chair’s overriding preoccupation with inflation – which has yet to rise – has weighed on US growth. At the same time, Mr Trump has accused central bankers in other countries of being currency manipulators who use loose monetary policy to weaken their national currencies against the dollar. That is rich coming from Trump, whose belligerent attitude towards the rest of the world – particularly in terms of foreign policy and trade – is largely to blame for the current economic slowdown and recent fall in inflation.

In any event, central banks are now being forced to respond to the worsening macroeconomic climate. A major change of course is taking place, and policy normalisation is now outdated. In light of the potential slump in international trade and sharp decline in inflationary expectations, the Fed and the European Central Bank have already announced rate cuts in the second half of the year. The bond markets were quick to react: long-term yields dropped sharply around the world and even fell to record lows in Europe. This further decline in yields suggests that the business cycle won’t yet come to an end – even if the cycle is maturing, it’s far from the overheating typical at the end of a cycle.

In this climate, risky assets, and particularly equities, are likely to outperform. This is especially true given that investors’ expectations are at rock bottom as a result of concerns relating to the US-China trade tensions and the complex geopolitical situation in the Middle East. Unless there is a dangerous escalation on one of these fronts, we think it is worth staying overweight equities. They offer the best prospects and, in general, they are priced reasonably relative to other asset classes.

It’s worth noting that central bank decisions are likely to have a huge impact on the forex market. If interest rates are lowered considerably in the USA, this would hit the dollar. And if other central banks fail to act, their currencies may gain ground. The Swiss National Bank and the Bank of Japan, for example, have kept strangely silent. As a result, we are reducing our exposure to the dollar and upping our exposure to the yen within our investment grids. And given that the Swiss franc is likely to appreciate, we are strengthening our weighting in this currency by increasing our euro hedging in CHF-denominated portfolios.

To go deeper

Legal

The Piguet Galland & Cie SA website (the "Site") describes the activities of Piguet Galland & Cie SA in Switzerland. Piguet Galland & Cie SA does not offer its services outside of Switzerland, and the Site is meant solely for individuals and legal entities domiciled in Switzerland, along with existing clients of Piguet Galland & Cie SA.

Personal informations
Nos services n'étant disponibles qu'aux résidents suisses, le choix du pays de domicile n'est pas disponible.
You must accept the terms of use.
* required fields