LGT Private Banking House View

October 2024 - in a nutshell

The US economy remains stable with solid consumption, and the Federal Reserve has begun a rate-cutting cycle to support growth. While we maintain our US equities "Overweight", we introduce an "Underweight" in Japanese equities. Fixed income stays "Underweight", but we see value in government bonds to balance out portfolio risks, and maintain strategic weights in corporate bonds. 

Date
Auteur
Gérald Moser, CIO & Head Investment Services Europe
Temps de lecture
7 minutes

House View Oktober 2024
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Macroeconomic environment

The US Federal Reserve has cut its interest rate by 50 basis points, a decisive response to the recent sharp cooling of inflation and a slowdown in labour market dynamics. The fourth quarter of 2024 is expected to be growth-challenged, primarily due to the ongoing weakness in global manufacturing, slowing US consumption growth, and stagnating demand from China. While the service sector continues to contribute positively to global economic growth, it too is showing signs of deceleration. On the bright side, central banks now have more room to shift their excessive focus from fighting inflation to supporting economic growth and the labour market.

Investment strategy

The LGT Private Banking Europe Investment Committee maintains its "Overweight" position in global equities, especially in the US, while introducing an "Underweight" in Japanese equities due to expected volatility and economic challenges. We’re keeping an "Underweight" stance in fixed income, particularly in emerging market bonds and alternative investments like insurance-linked securities. Recent data shows a stable US economy with solid consumption, prompting the US Federal Reserve to start a significant rate-cutting cycle, reducing the key policy rate by 50 basis points and projecting further cuts to support economic stability. The committee expects the Fed Funds rate to drop to 3.5% by mid-2025. Despite high valuations, particularly in US tech companies, we see potential in sectors benefiting from rate cuts and maintain a positive outlook on US equities. 

Equity strategy

Our expectation of an economically "soft landing" combined with a new cycle of interest rate cuts offers a continued constructive fundamental environment in the US, which is why we are sticking to an "Overweight" in US equities. The upcoming reporting season for the third quarter should confirm that the recovery in earnings growth is continuing, even against a more difficult comparison base in the previous year. By contrast, we are taking a more cautious stance on Japan. The fundamentally encouraging structural developments are overshadowed by tactical clouds in the short term. Japan may have reached the peak of its "goldilocks economy" – i.e. solid economic growth combined with ultra-loose monetary policy and a weak yen – while risks to economic and earnings growth and in monetary policy have increased. We are therefore downgrading Japanese equities to "Underweight". In terms of sector strategy, we would once again like to emphasize the attractiveness of interest-sensitive sectors in an environment of falling interest rates. Lower refinancing costs, a growing relative advantage of high dividend yields and room for potential rerating offer an appealing risk/return profile in the context of falling interest rates. We rate both the utilities and real estate sectors as "Overweight".

Fixed-income strategy

We maintain our neutral allocation in government and corporate bonds and reaffirm our "Underweight" position in emerging markets (HC). After the significant interest rate movements, particularly in the USD area, where overly pessimistic economic outlooks were priced in, we expect some counter-movement, which is also likely to affect the long end of the yield curve. Additionally, there is increased fiscal policy uncertainty in the US, which is why we are positioning ourselves at the short end of the yield curve for government bonds, while we prefer a neutral duration position for EUR bonds. With the exception of EUR investment-grade corporate bonds, we consider the credit market to be rather expensive. However, fundamental credit indicators do not suggest an imminent correction, which is why we remain neutrally positioned in this area.

Currency strategy

As the US presidential election approaches, the impact on the US dollar becomes a topic of interest. After the debate between Kamala Harris and Donald Trump on 11 September 2024, the dollar weakened slightly, suggesting the market believed Harris won. The election contest could have varying implications for the dollar: a Trump victory might temporarily boost it due to potential trade and pro-growth policies, while a Harris win could lead to a bearish move driven by dovish expectations for the Federal Reserve. However, neither outcome is likely to reverse broader global trends.

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