In the latest edition of our Quarterly Market & Strategy Update:
Executive summary
Economy
Underwhelming economic data across major economies during Q3 have raised fears of an upcoming recession. The EU and China have been particularly weak, while cracks appeared in the US labour market.
Yet, various leading indicators still suggest that a recession is unlikely, as labour markets remain resilient and should support consumption. The recession scenario has been weakened further by China’s latest attempt to reflate its economy.
Just as central banks are celebrating their victory over inflation by validating the market’s expectations of aggressive cuts, growth and inflation are likely to exceed expectations, particularly if fiscal policies remain as supportive.
Equities
Corporate profits have remained supported by the high nominal growth environment. The combination of easing central banks and resilient growth will remain favourable to equities, particularly now that seasonality is turning positive again.
A change in leadership appears to be underway, with technology companies in the back seat, and more cyclical businesses taking the lead. This broadening of the market, following a quarter of sideways action, should be taken as a vote of confidence in the economy. Elevated valuations in the US, rate cuts and China’s reflation is likely to see capital flow to the APAC region.
While the outlook for equities is constructive, investors can protect gains into year-end by taking advantage of cheap volatility via options.
Bonds
Yields have fallen sharply across the curve in Q3 as central banks opened the door to aggressive cuts on the back of underwhelming growth and slowing inflation. At current levels, long-term yields are unattractive, particularly given risks that inflation and growth prove stickier than expected, leading to less cuts.
Moreover, expansionary fiscal policies are creating a challenging supply picture for developed market bonds. While the tightness of credit spreads points to a supportive growth environment, they do not offer much value at these levels.
With rate cuts under way and the USD on the back foot, specific emerging market bonds in local currency look particularly attractive given elevated real yields.
Currencies
Expectations that the Fed will cut rates more aggressively than its peers are likely to be proven wrong, supporting the USD against major currencies (except the JPY).
On the other hand, China’s reflation attempt should be supportive of several EM currencies.
Commodities
With growth fears dominating in Q3, commodities have been through a soft patch. As growth proves resilient and China’s reflation attempt takes hold, investors are likely to seek commodity exposure to hedge against the possible resurgence of inflation.
Recent extreme bearish positioning suggests that oil should bottom at this key level, but a change in OPEC+’s production stance is a risk to monitor.
Precious metals
Gold’s raging bull market has continued unabated and has yet (reassuringly) failed to make headlines.
While excessive speculative positioning could see some sharp pullbacks, they are likely to be bought aggressively by western investors, who have only recently started buying into this rally.
To read our complete Market & Strategy Update
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