November AA Insights

October AA Insights

September AA Insights

*TACO: “Trump Always Chickens Out” - **WACO: “World Always Chickens Out”

Volatility may persist, but recovery is underway. Stay invested, avoid market timing, watch US strength, and diversify across sectors/regions. Read below:

Overall, the macro and liquidity conditions are still positive for risk assets, even if downside risks and uncertainties have increased recently. While earnings growth momentum continues to accelerate, equity market valuations remain rich, especially in the US. We also observe some deterioration in market dynamics: sentiment is overbought, and market breadth has been deteriorating. While we maintain a constructive view on equities, we move to a more balanced positioning in terms of asset classes and regions and downgrade our view on equities from overweight to neutral. - While we still have a structural preference for US equities over the rest of the world, we are neutralising our tactical regional stance as valuations and macro-economic momentum may lead to a continuation of the dynamics at play since the beginning of the year. - Within rates, we adopt a more neutral stance on long-term government bonds, as potential downside risks to growth now balance the uncertainties around the inflation outlook. We continue to favour the 1-10 years segment in the fixed income allocation. - We keep our gold and hedge funds exposure for diversification purposes. Our stance on currency –overweight dollar against major pairs except Swiss franc— is unchanged.

Key takeaways  Overall, the macro & liquidity conditions are still positive for risk assets. While equity market valuations are rich, especially in the US, earnings growth momentum is accelerating, and market dynamics remain favourable. Consequently, we maintain our overweight stance on equities and underweight on bonds.  While we maintain our preference for US equities over the rest of the world, we are neutralising our stance on eurozone and emerging markets equities as the specific tariff risk seems to be already well priced in.  Within rates, we continue to favour the 1-10 years segment over long-dated bonds.  We maintain our gold and hedge funds exposure for diversification purposes. Our stance on currency (overweight dollar against major pairs except the Swiss Franc) is unchanged.

• Overall, the overall macro and liquidity conditions are rather positive for risk assets. Still, equity market valuations are rich, especially in developed markets and some risks are under-priced. Consequently, while we keep our preference for equities over bonds, we refrain to increase exposure at this stage. We keep our neutral stance on equities. • Our view on Eurozone equities is downgraded from neutral to negative, mainly due to weakening economic trend, while we upgrade our view on emerging markets from negative to neutral (China stimulus, improving earnings dynamic, room for easier monetary policy). • Within rates, we continue to favour the 1-10 years segment over long-dated bonds. • We keep our gold and hedge funds exposure for diversification purposes. Our stance on currency (neutral dollar against major pairs) is unchanged.

We expect the Fed rate cut cycle to start soon and proceed gradually. Barring a financial crisis or a sharp and unexpected change in the path of inflation or unemployment, the upcoming rate-cutting cycle won’t be dramatic; we expect the Fed to make incremental, 25 bps cuts to its policy rate. Moreover, the Fed is going to stay highly data dependent and will calibrate accordingly. Overall, this is a rather positive scenario for risk assets. Still, equity market valuations are becoming rich, especially in developed markets. Consequently, we keep our neutral stance on equities. We are upgrading all currencies (EUR, CHF, CHF, JPY, EM currencies) back to neutral vs USD (from Negative). Technicals have turned against the US dollar and the Fed has sent a clear signal about coming rate cuts.

We believe that the current market correction is driven by technical factors rather than macro and fundamentals. The unwinding of the yen carry trade was an accident waiting to happen (see our June 2022 FOCUS note “Has Japan’s central bank created a monster?”). The heavy net long positioning by CTAs, the traditional low liquidity of August and the high valuation ratios of some crowded trades (e.g Mag 7) created the perfect “summer cocktail” for pullbacks of major global equity indices and a spectacular spike of the VIX. As explained in our FAQ, there is no reason to panic as macro and fundamental conditions remain favourable to equity markets. Still, history shows that stock markets remain bumpy in the 4 to 6 weeks which follow a spike in the VIX. As such, we’re keeping the current equity allocation unchanged (neutral vs. SAA) and adding some long duration bonds to portfolios as a diversifier.