We remain constructive despite higher yields. We consider the additional rate hikes priced in as excessive and do not expect a new tightening cycle. Solid fundamentals mean we continue to favour equities, with a focus on tech and cyclicals. We are cautious on European equities. Australian government bonds and precious metals are attractive as hedges.
Author: Dr. Roger Rüegg
September was eventful. Contrary to our expectations, the situation in Iran has deteriorated. As a result, the oil price is once again trading close to the economically critical threshold of USD 100. Combined with strong US economic data (US PMIs > 58), this has led to a sharp rise in yields (US 10y > 5%). The market is now pricing in four additional rate hikes by the Federal Reserve (Fed) and the European Central Bank (ECB) (see chart). Although we also expect further rate hikes in view of higher inflation rates, we consider market expectations to be excessive. Core inflation remains moderate and rate hikes do little to counter an energy supply shock. In the eurozone in particular, higher rates will dampen economic growth. We therefore remain long duration in foreign bonds, especially in Australia.
Despite rising yields and warnings from AI experts, tech was once again the clear winner in September. All other sectors ended the month in negative territory. Tech has thus re-emerged as the driving force for the overall market. We are accentuating our overweight by adding US equities.
The reasons:
We therefore remain overweight tech and cyclical stocks in our portfolio, while becoming more cautious on European equities due to ECB rate hikes, the stronger euro and weaker earnings growth.
We are making no changes in alternative investments and remain slightly overweight in precious metals and catastrophe bonds. The interesting season (hurricanes) is now beginning in this segment. As mentioned above, we are reducing our USD underweight. In return, we are trimming our EUR exposure. Our preferred currency remains the AUD, which benefits from high commodity prices and attractive carry. We are also overweight emerging-market currencies and CAD.
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