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.
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 A major change of course is taking place, and policy normalisation is now outdated.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
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