The sector rotation in October from cyclical to defensive was a statistical outlier and weighed on our positioning. However, there are hardly any fundamental reasons for this: technology companies are delivering strong earnings growth and the use of AI is increasing. Nevertheless, capital markets are demanding higher risk premia due to the enormous financing needs. While we do expect a countermove after the US midterms, we are slightly reducing our high exposure to the AI supply chain in view of the increased uncertainty and are using global government bonds ex EUR for hedging.
Dr Roger Rüegg
Our expected scenario for government bonds materialised in October. For some time now, we have believed that concerns about government debt and inflation are exaggerated and that government bonds are attractive at this yield level. In October, the yield on 10-year US government bonds fell back below 5% despite another increase in the oil price, higher inflation figures and solid economic data. Our tactical position in long-dated US government bonds generated a performance of 6% as a result. We are therefore increasing duration in the US once again – also to protect against potential further price setbacks in technology equities. However, we are remaining underweight in EUR bonds due to political unrest.
As in July, we experienced a pronounced sector rotation in October. AI names were heavily penalised and many investors favoured defensive sectors. The overall market remained surprisingly robust, but beneath the surface the differences were significant: technology -7%, energy +10%, consumer staples +8%. We are now expecting a countermove, particularly in the heavily punished emerging-market equities. These have now become very cheap with a P/E ratio of below 9 and are fundamentally much more attractive than, for example, European equities. In return, we are reducing our overweight in global equities, as the pressure from tighter financial conditions is increasing.
In alternative investments, we remain invested in cat bonds and gold. The gold price has suffered, but so far it has held at the psychologically important level of USD 4,000 per ounce. The cat bonds can once again report a strong investment year, as major losses due to environmental catastrophes failed to materialise. Although return expectations are no longer as high as in the past, they remain an important diversifier in the portfolio.
We are keeping the euro underweight due to political unrest and excessively high interest-rate expectations. We remain overweight in the Australian dollar and in emerging-market currencies.
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