Is US dominance now eroding?

In the 1980s, Japan was one of the heavyweights in the world equity index with a share of over 40%. Thanks to strong economic growth, Europe gained in importance in the noughties. Today, however, the situation is completely different and there is no way around the USA: with a weighting of over 70%, the United States is and remains absolutely dominant.

In autumn, the focus will continue to be on the Americas. On 18 September, the US Federal Reserve is expected to initiate its cycle of interest rate cuts, and on 5 November, the US presidential elections will take place, the outcome of which is once again completely open.

Switzerland ahead of the USA

Will the outperformance of the USA on the stock markets continue, fuelled by the sensational profits of the big IT companies? We are sceptical and are shifting more to other regions.

In terms of equities, we favour Switzerland, the UK and emerging markets. However, earnings growth in the eurozone remains too subdued, which is why we remain underweight there. Earnings revisions in Japan look much better, which is why we are now buying there. We are maintaining our neutral equity allocation for the time being. On the one hand, momentum is intact and monetary policy remains supportive. On the other hand, valuations are still very high and the economy is likely to weaken further.

Period of weakness looming

The majority of our sentiment indicators are also in neutral territory. We are monitoring these very closely, as the two weakest equity weeks of the year are due from mid-September and a second wave of selling usually follows a 10% correction. Our overweight in the Japanese yen and gold as well as our strong overweight in global government bonds at the expense of corporate bonds offer some protection against such a scenario.

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

Positive profit revisions in Japan

• The Japanese stock market has recovered from the sharp correction of minus 25%, but in contrast to other regions, the highs are still around 10% away.
• Earnings revisions are strongly positive and the relative valuation (P/E ratio 15 vs. 19 world) is now very favourable in a historical context. Fundamentally, Japanese equities are attractive.
• The main risk remains additional interest rate hikes by the Bank of Japan and thus a further unwinding of carry trades, although the yen offers a certain degree of protection.

Long duration in the eurozone

• Yields in basis points (bp) have fallen much more sharply in the US than in the eurozone since May (-90bp vs. -40bp). However, the European economy is no better off and the sovereign debt problem is even more pronounced in the USA.
• For September, both the Fed and the SNB have priced in more interest rate cuts than the ECB. In the short term, US Treasuries have therefore probably overshot German Bunds somewhat.
• We are reducing US Treasuries and buying euro government bonds with maturities of between ten and 15 years in return. This is where the yield curve is currently at its steepest.

USD ready for rebound

• The USD has depreciated sharply over the summer (-5% since the end of June) and is now trading at its lowest level against the euro since summer 2023 (USD/EUR at 0.89).
• With a Realtive Strength Index (RSI) of 30, it is now oversold and we consider the Fed's interest rate cuts of 1% by the end of the year to be exaggerated. In addition, the US dollar shows very strong seasonality in September.
• Although we expect the US dollar to weaken in the medium term - due to debt, valuation and de-dollarisation - we are tactically switching from an underweight to an overweight and, in turn, reducing the overly strong euro.

Tactical Asset Allocation in September 2024