Tareno View October 2024
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.
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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.
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