Don't worry, be happy... (for now)

The S&P 500 has broken the magic barrier of 5,000 points and the Japanese Nikkei has finally reached its all-time high of 1989. This is despite the fact that the central banks have dampened overly optimistic hopes of rapid interest rate cuts. The stock market bulls are being bolstered by the high level of corporate profitability, which can be seen in the persistently high margins in the reporting season (despite moderate sales growth). In combination with a robust economy in the USA and the constantly expansive fiscal policy, this makes the Goldilocks scenario appear realistic – don't worry, be happy! 

Warning signs on the horizon

Certain indicators are now warning of excessive euphoria. Nonetheless, extreme values have not yet been reached. The situation is similar in terms of valuations, with the price/earnings ratio (P/E) of global stock markets standing at 18.5 (based on expected earnings). In the past 20 years, it has only been higher during the post-coronavirus rally (P/E of 21). The risk of a bubble forming, provoked by hopes in artificial intelligence, is real. However, we believe that the peak has not yet been reached and are therefore going with the momentum.

Protective wall against inflation

In our portfolios, we are therefore selling small caps that are not making any headway and buying global equities with strong momentum in return. Sooner or later, however, the central banks' dilemma is likely to come to the fore again, as a strong economy combined with interest rate cuts will cause inflation to rise again.

On the other hand, significant cost reductions are necessary in order to maintain the high margins. We are therefore only slightly overweight in equities and are hedging against rising inflation expectations with inflation-linked government bonds and gold. We remain underweight in bonds, but are increasing the duration again following the recent rise in yields.

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

• Due to the strong correction in China (-60% since the peak in 2021), the MSCI EM is now much better diversified: China 23%, India 18%, Taiwan 16%, Korea 12%, Brazil 6% etc.
• China has built up momentum in recent weeks and should soon break out of its downward trend – the P/E ratio remains extremely low at 10, but the structural problems persist.
• India is very expensive, but the momentum and earnings growth is incredibly strong. Korea and Taiwan are also doing well thanks to the IT sector.

• US insurance companies have been able to boast strong profit revisions, as price increases can be easily passed on and margins are high.
• With a P/E ratio of 11, the sector is pretty much in line with the long-term average and is therefore not expensive. The relative price momentum is strong.
• Insurance companies benefit from higher interest rates and are more price-sensitive than banks. They therefore act as a hedge against rising interest rates.
• Debt is low (debt/equity 41 vs. 133 worldwide) and free cash flow yields are high (11% vs. 4% worldwide).

• The Australian dollar is very favourably valued compared to its history. Any recovery in China could lead to a strong appreciation.
• At over 4%, the yield level on 10-year government bonds is attractive and we expect significantly fewer interest rate cuts from the Reserve Bank of Australia than from the other central banks.
• By buying AUD bonds, we are reducing our duration underweight in our portfolios and becoming somewhat more cyclical in terms of currencies.

Tactical Asset allocation EUR in March 2024