Tareno View October 2024

In the October issue of Tareno View, our CIO Simon Lutz explains how Tareno is positio­ning itself in the current volatile markets and the importance of funda­mental data.

published: 03.10.2024

The funda­men­tals: A guide in volatile markets

The markets are currently bouncing from one indicator to the next while going through a roller­co­a­ster of emotions. Not only indivi­dual economic indica­tors, even state­ments by execu­tives of large compa­nies can lead to unusual fluctua­tions in the stock markets. Investors should not be discou­raged by this brief vision. Funda­mental data will continue to deter­mine the long-term trend. An increase in the supply of liqui­dity due to the global interest rate cuts is a strong positive driver for the finan­cial markets that should not be undere­sti­mated. In combi­na­tion with the overall solid state of the global economy and the conse­quent rise in corpo­rate profits, the overall picture for the finan­cial markets is solid.

 

Macroe­co­nomic environ­ment

Good things come …

First interest rate move by the Fed

The conti­nuing slowdown in the labour market and easing infla­tio­nary pressure led to rising expec­ta­tions of a major interest rate hike in the days leading up to the Fed meeting. And they were not disap­pointed. The central bank announced a cut of 50bp and remained open to the option of further cuts before the end of the year.

The economy is develo­ping soundly and in order to keep it that way, we are not afraid to cut interest rates signi­fi­cantly. This is the commit­tee’s reaso­ning. Market expec­ta­tions are for two further cuts of 25bp each by the end of 2024.

Base scenario: Soft landing

Fears of a reces­sion in the US have repea­tedly surfaced over the past two years. This has also been the case in recent months. The trigger has always been indivi­dual reports of disap­poin­ting economic data. However, there is no suffi­cient data basis for a clear weake­ning of the US economy. The Atlanta Fed’s real-time estimate is once again foreca­sting above-average economic growth for the third quarter.

The global economy is in robust shape overall. China and Germany are promi­nent excep­tions, but this does not change our assess­ment: the risk of reces­sion is low as the baseline level is high and the upcoming interest rate cuts will lead to more favourable finan­cing condi­tions. This favours borro­wing and ultim­ately invest­ment activity.

 

Market commen­tary

Emotions dominate

Between optimism and caution

The markets fluctuate between optimism and caution. There are numerous reasons for the short-term and emotional behaviour of investors: interest rate develo­p­ments, reces­sion or soft landing, currency volati­lity, seaso­na­lity or the upcoming elections in the US. Now more than ever, it is essen­tial not to lose sight of the big picture.

The fact that sticking to a chosen strategy pays off was demon­strated in August. Follo­wing an unexpected interest rate hike by the Bank of Japan, the yen’s exchange rate rose sharply within a short space of time. Market parti­ci­pants who had financed their invest­ments with yen loans were forced to close out their positions. The market slump was also evident outside Japan, but was recovered within a few weeks.

Increased inflows into the stock markets

Falling interest rates world­wide are causing yields on cash holdings to shrink. As a result, many investors will shift excess liqui­dity into bonds, equities and alter­na­tive invest­ments. This will signi­fi­cantly support asset prices in the months ahead.

 

Moderate valua­tions

A look at the valua­tions shows that – with excep­tion of major US growth stocks – valua­tions are largely moderate. The valua­tions of Swiss equities are slightly below the histo­rical average. There is nothing to prevent the upward trend on the equity markets from conti­nuing.

Tailwind for small caps?

Small and medium-sized compa­nies have histo­ri­cally benefited more from falling interest rates. The segment has under­per­formed for a long time and is defini­tely attrac­tive from a valua­tion perspec­tive. We see favourable oppor­tu­ni­ties for small and mid caps to lead the next market phase.

 

Invest­ment policy

Capita­li­sing on oppor­tu­ni­ties

Bonds: less attrac­tive

Bonds have performed well so far this year. Yields are likely to be modest again in the near future. It seems that expec­ta­tions of further interest rate cuts are now somewhat exagge­rated. If infla­tion, taxes and costs are taken into account, the current yield will in most cases result in a loss of purcha­sing power for investors. Bonds are there­fore once again prima­rily used to manage liqui­dity and offer the advan­tage of diver­si­fi­ca­tion in case of a reces­sion.

We are there­fore focusing our asset alloca­tion on expan­ding alter­na­tive invest­ments such as infras­truc­ture.

Attrac­tive equity risk premiums

In terms of the risk/return ratio, we are maintai­ning our weighting in equities. In Switz­er­land in parti­cular, we find many quality compa­nies with attrac­tive dividend yields. These offer additional protec­tion against a possible economic slowdown.

Acqui­si­tions in the field of AI

Interest rate cuts are positive for growth stocks. We have there­fore used the price correc­tion on the equity markets in the run-up to the Fed’s decision to increase our exposure to this promi­sing market.

Gold keeps on shining

Our convic­tion in gold remains intact despite the record high. We see no signs that the under­lying condi­tions are changing in a way that will affect the value of the precious metal. Demand, especi­ally from central banks in emerging markets, is robust and the US Federal Reser­ve’s upcoming rate cut cycle makes gold more attrac­tive due to falling oppor­tu­nity costs.

In addition, gold remains an effec­tive hedge against incre­a­sing geopo­li­tical risks, uncer­tain­ties ahead of the US presi­den­tial election and poten­tial debt and budget deficit concerns in the US. For us, gold is a funda­mental invest­ment in a diver­si­fied portfolio, not a tactical position.

Legal notice

Tareno AG, Garten­strasse 56, CH-4052 Basel, +41 61 282 28 00

Tareno AG, Clari­den­strasse 34, CH-8002 Zürich, +41 44 283 28 00

info@​tareno.​ch
www.tareno.ch

Respon­sible

Simon Lutz
Chief Invest­ment Officer
s.​lutz@​tareno.​ch

 

Disclaimer

The state­ments and data in this publi­ca­tion were compiled by Tareno AG to the best of its knowledge, in part from external (publicly acces­sible) sources that Tareno AG considers reliable, solely for infor­ma­tion purposes. This publi­ca­tion is not the result of a finan­cial analysis. Tareno AG and its employees are not liable for incor­rect or incom­plete infor­ma­tion or for losses or lost profits resul­ting from the use of infor­ma­tion and the conside­ra­tion of opinions expressed. The state­ments and infor­ma­tion do not consti­tute a solici­ta­tion or invita­tion, offer or recom­men­da­tion to buy or sell any invest­ment instru­ments or to engage in any other transac­tions. Nor do they consti­tute a specific invest­ment proposal or other advice on legal, tax or other issues. A positive return on  an  invest­ment  in the past is no guarantee of a positive return in the future. The state­ments, infor­ma­tion and opinions expressed here are only current at the time of writing and may change at any time. Dupli­ca­tion or repro­duc­tion of this publi­ca­tion, even in part, is not permitted without the written consent of Tareno AG. The „Direc­tives on the Indepen­dence of Finan­cial Research“ of the Swiss Bankers Associa­tion do not apply.

Pictures: Marijke Vosmeer, Jürg Kaufmann, Unsplash

Charts: Tareno AG