• US growth remains strong
• Fed switches to cutting interest rates
• Markets in optimistic mood
• Equity allocation in line with strategic weight

In September, financial markets were positively impacted by AI and the US Federal Reserve (Fed). Global equity markets posted gains of 3.7% for the month and 8.1% for the quarter. The S&P 500 rose 3.6% in September, Europe (EMU) gained 2.9%, and Japan benefited from structural reforms, rising 3.2% for the month. China led the way in September with a gain of 9.6%. The performance of Emerging Markets equities is particularly notable. Particularly noteworthy is the performance of equities in emerging markets. When expressed in native currency, the stock markets of Brazil (+22%), Mexico (+29%), and Korea (+34%) have all had notable gains since the year began. High US import tariffs are a problem for emerging markets, and price increases have been mostly driven by the prolongation of the US-China trade ceasefire, optimism about AI, and possible central bank interest rate cuts. Since the beginning of the year, the stock markets of Korea (+34%), Mexico (+29%) and Brazil (+22%), measured in local currencies, have seen significant increases. Emerging Markets are facing high US import tariffs, with the extension of the tariff truce between China and the US, AI optimism, and potential central bank interest rate reductions proving to be key drivers of price gains.

The US experienced a fifth consecutive month of rising stock prices. The US stock market boom has been going on for nearly three years, with the S&P 500 up nearly 90%. The technology sector is driving the stock indices higher. The rally continues to be driven by US IT giants with substantial investment budgets for generative AI. Investor confidence was further boosted by the Fed’s first interest rate cut of the year, with hopes for more. This also once again led to an outperformance of growth stocks versus value stocks. Other risky asset classes, such as Real Estate and Commodities, also rose, but to a lesser extent. In the third quarter, oil prices fell, driven by expectations of increased supply. Bond markets were volatile in the third quarter due to geopolitical unrest and, here too, the Fed’s intention to lower interest rates. The Bloomberg Aggregate Bond Index rose 0.6% in the quarter. US Treasuries performed relatively better (+1.5%), while US corporate bonds performed even better (+2.6%). However, credit spreads continued to tighten.

A central bank that persists in implementing a restrictive interest rate policy, as well as high and continuous additional import tariffs, are two examples of political unrest. Nevertheless, the US economy is still expanding. We think that the US cannot continue to grow at such a rapid pace. Although we think growth is moderating, hyperscalers like Alphabet, Amazon, and Microsoft are still likely to make significant investments in datacenters. There are conflicting signals for customers. Consumers are worried about their net discretionary income, the labour market is weakening, and inflation is still there. Consequently, September saw a decline in consumer confidence. In fact, the pace of savings has decreased while spending growth has surged. The American consumer seems to be using savings to partially finance their purchases.

The Eurozone economy has proven resilient following the high import tariffs imposed by the US. The services sector, which accounts for 70% of the European economy, appears to be improving. The purchasing managers’ index also rose above 50 in September. A figure above 50 indicates growth. However, corporate earnings momentum is still lagging. The European Central Bank (ECB) has since implemented interest rate cuts, and Eurozone households are still sitting on substantial savings. Overall, we expect growth, but whether growth accelerates depends largely on the political situation in France and the impact of fiscal spending plans in Germany.

We maintain a neutral outlook. Economic growth is holding up better than expected and the Fed is lowering its policy rate, but against this backdrop, markets have risen rapidly. And there is still uncertainty about the outcome of the trade war, with potential for increased inflationary pressure in the US. There is a real risk that financial markets are underestimating the potential inflationary impact of the tariffs yet to come. Earnings momentum has improved in the US, but remains weak in Europe. In Emerging Markets, we believe weakened earnings momentum is incompatible with strong equity gains. Key trends to monitor include the (outlook for) capital expenditures of large IT companies (hyperscalers) and the AI-driven competitive landscape, which is impacting free cash flow and corporate profit margins.

We believe the Fed will continue to lower interest rates. For next year, we consider the number of interest rate cuts the market expects somewhat aggressive. If these expectations are adjusted, it will lead to a rise in the 10-year interest rate. We believe the room for a lower 10-year interest rate in Germany is limited, partly due to the more accommodative fiscal policy there. Our slightly overweight position in Government Bonds is primarily driven by the tight risk premiums on Corporate Bonds. Low growth without a recession and falling inflation traditionally creates an environment in which Investment-grade Corporate Bonds thrive. However, we consider the risk premium for dollar-denominated Corporate Bonds too tight. Therefore, we remain underweight in these areas. In the Eurozone, the risk premium is relatively lower and also represents a lager share of the total yield. Furthermore, we consider the balance sheets of companies in the Eurozone somewhat stronger. Balance sheets have also strengthened in the European banking sector. Therefore, we still prefer Investment-grade Corporate Bonds over Government Bonds in the Eurozone.

In both the US and Europe, risk premiums are historically low. Given this, we believe that the upside potential of High Yield Bonds is lower than for equities. We consider an average yield of 5.9% generally low for Emerging Market Government Bonds compared to bonds from Developed Countries. Moreover, local currencies could come under pressure from US import tariffs. Our view is neutral. Now that there is more clarity surrounding Trump’s trade policy, real estate is moving more in line with interest rates. US trade policy has a particularly deflationary effect on the Eurozone, but this is offset by interest rate pressure from higher German tax expenditures. Global real estate is expensive relative to interest rate levels, and we consider Europe to be neutrally valued. Therefore, we maintain an overall neutral outlook.

 

Gold is at a historic high. We believe the gold price is supported by central bank purchases and potential interest rate cuts. How long this will last is impossible to predict. Gold is attractive in time of uncertainty; given its high price, much uncertainty and/or interest rate declines are already factored into the gold price. Although geopolitical risks could lead to higher oil prices in the short term, we expect structural developments to have a dampening effect in the long term, with increased production from OPEC+ countries and a slowdown in the global economy and trade. Base metals remained relatively stable. In the short(er) term, there is a slowdown in (Chinese) economic growth, which will dampen demand for metals and prices. In the long(er) term, copper appears well-positioned for structural developments such as the energy transition and AI.

 

Please find attached our last Asset Allocation Update for October.