A dramatic shift
Much has changed since the summer, when markets feared a US interest rate cut would signal a recession. The Federal Reserve did slash rates by 75 basis points (bps), but the economy has shown some improvement. Combine that with China’s stimulus and reasons for faster rate cuts in Europe, and the fundamental picture seems brighter at the moment. The outcome of the US election is only adding to those positives for the US economy, in the context of a rather pessimistic market. We continue to see upside for most markets, with some volatility along the way.
Below we outline the three key themes driving convictions this month across our long-only equity, fixed income, multi-asset and convertible bond strategies.
To be sure, some negatives do remain. Consumers are pulling back, which hurts the discretionary sector. The situation in Asia also continues to exert pressure on the numbers and Germany’s economy remains in a difficult state.
Several positive developments have emerged, nonetheless: rate cuts; a broad improvement in US economic indicators; a slight increase in US inflation, which could support earnings; the Chinese stimulus; and now the prospect of a corporate tax cut in the US.
Consequently, while 2024 and 2025 earnings per share estimates for the S&P 500 have been revised down recently, they still point to growth of 9% in 2024 and 15% in 2025. These expectations were also set against a backdrop of deteriorating conditions. The new positives have yet to be fully reflected in market prices, which could occur in the context of a sector rotation – at the moment financials and US smaller caps are posting strong returns, mirroring this pivot in macro and market factors.
FIG 1. Percentage of improving data related to growth prospects, and expected earnings and sales growth for the S&P5001
2. Faster ECB, slower Fed
There is a notable divergence between the US and Europe. The US economy appears to be stronger than anticipated, as evidenced by indicators such as the ISM indexes and retail sales data. US inflation has been on the rise for two consecutive months when measured by quarterly variations. Meanwhile, the Trump administration is likely to add to both growth and inflation pressures in the coming year. That is unlikely to prompt the Fed to change course, although it might slow the pace of rate reductions.
Europe presents a different story. As repeatedly highlighted by Christine Lagarde, growth risks in the region have increased, and the potential trade tariffs in 2025 could add to this gloomy picture. Having initiated rate reductions earlier than the Fed, the ECB might now start to cut more swiftly as well.
FIG 2. US core inflation and composite PMI employment subcomponents by country1
3. China: words need to become action
China faces economic challenges, with its year-over-year growth for Q3 projected at just 4.5% -- a relatively weak result for the country. In response, both the central government and the central bank have taken decisive steps, focusing on three key areas: (1) stimulating consumption, (2) stabilising the housing market and (3) managing regional bank debt.
Recent data from the nation’s Golden Week holiday suggests that consumption levels are not as dire as some might have feared. Property transactions, for instance, have notably exceeded expectations—an early sign that policy measures aimed at relaxing certain economic constraints are starting to bear fruit. There have also been positive reports on durable goods spending.
With stimulus plans in place, Chinese and emerging market (EM) assets could potentially make a comeback after being largely shunned by investors. However, for any glimmers of hope to be fully realised, words need to transform into deeds. It is even more the case today, as trade tariffs could hurt the country’s exports: in China the solution looks increasingly to be coming from the inside rather than from outside of the country.
FIG 3. China growth nowcaster compared with other regions, and CTA’s beta per asset class percentiled1
Our positioning
Given the growing number of positives, and specific situations in the eurozone and China, our consensus for allocation across investment universes remains bullish to neutral, depending on the asset class.
Multi Asset. Neutral outlook reflected by balanced exposure, with a 60% allocation to hedging assets and 40% to cyclical risk premia. For our flagship strategy, our market exposure is about 140%.
Fixed Income. Tight credit spreads are a reason for caution, though we are positive on duration as cash rates decline and on investment grade, where we perceive an attractive risk/reward balance. We continue to see opportunities arising from fallen angel bonds. In Asia Fixed Income markets, we are overweight duration, India, commodities and high-yield sovereigns.
Convertible bonds. We took the recent correction in China as an opportunity to increase exposure while maintaining our overweights to the US, AI-linked companies and utilities. Neutral on Europe, Taiwan, Korea and Japan.
Equities. In our World Brands strategy, which recently marked its 15-year track record, we are reducing exposure to technology and digital companies, and have increased holdings in select financials and China domestic brands. In Europe, we remain broadly sector neutral, with our largest overweight being technology. In Switzerland, we have increased exposure to cyclicals at the expense of defensive stocks, with largest overweights in IT and utilities. In Asia, we are overweight consumer discretionary stocks and constructive on China, looking to diversify exposure to the consumer staples and basic materials sectors. Slightly underweight India and neutral the ASEAN countries.
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