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The global easing of monetary policy has received an additional boost with the first interest rate cut in the US since 2020. What is remarkable here is the level of the interest rate cut: at 0.5%, this was above the level at which interest rate cut cycles were initiated in the past, with the exception of recessions. The interest rate level is now 5%. Measured against inflation of around 3%, this is still high. However, the US monetary authorities have made it clear that their focus is now on supporting the labour market - notwithstanding the current moderate unemployment rate of 4.2%. This suggests further interest rate cuts to a normalised level of around 3% by mid-2025. Soft landing is therefore likely.

Pendulum continues to swing in the direction of equities

Monetary policy, together with fiscal spending that continues unabated, will have a significantly expansive effect. Even if the degree of stimulus is less pronounced in other regions or even austerity measures are planned in certain countries, we expect a positive effect on the equity markets, which justifies an equity overweight.

However, there are two risks to consider: Firstly, the weakening of corporate profits and secondly, possibly overly optimistic investor sentiment. Moreover, such an expansionary scenario could fuel inflation fears again. For this reason, we no longer see any immediate potential for USD bonds.

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

Small caps among the winners of additional cash liquidity

• The dominance of US large caps from the IT sector is unique. Six companies now account for 20% of global market capitalisation. This is largely underpinned by fundamentals, for example in Q4 2023 with incredible year-on-year earnings growth of 60%.
• However, earnings growth will now weaken and the large caps will grow relatively less strongly than before at 20%. This is why we have already rotated within the S&P500 towards mid caps this summer. In addition, we now see small caps as potential winners from lower interest rates.
• In general, emerging markets also benefit from an easing of interest rates in the USA. This is another reason for the existing overweight, which is also based on the earnings recovery.

Good prospects again for listed Swiss property funds 

• The effect of favourable financing on real estate is also positive. Interest rates in Switzerland were lowered early on.
• The listed Swiss property funds had to deal with capital increases and potential value adjustments in the summer. We were therefore underweighted here.
• There were price fluctuations, but the positive factors (low interest rates, excess demand, average premium) are now back in the foreground. We have therefore switched to neutral for listed Swiss property funds.

Gold: Tactical profit-taking

• Lower interest rates generally support the gold price. However, some things have already been anticipated: a 6% rise in September alone and an increase of almost 30% in USD terms since the beginning of the year.
• Tactically, we are therefore realising the gains from our overweight position since July, although our structural assessment remains positive in view of the need for alternative currency reserves.

Tactical Asset Allocation in October 2024