In Jackson Hole, Powell indicated that interest rates will continue to rise sharply and that interest rate cuts are unlikely to follow soon. This caught many investors on the wrong foot, as they were already counting on the US Federal Reserve being more merciful due to the gradual reduction in inflation rates. Thanks to our equity underweight and our protection strategy we were well positioned.
Since prices on the equity markets continue to be elevated (the risk premium is merely average, at around 3.9%), further interest rate hikes are set to follow, the Fed is now actively reducing its balance sheet, the economy is shaky (the purchasing manager indices in both the USA and Europe are below 50) and September is the seasonally weakest month for equities, we are maintaining the equity underweight.
If the equity markets now price in a decline in profits across the board and inflation rates actually return as strongly as expected, equities will become more attractive again.
In the case of bonds, we are making a small reduction in CHF bonds, as these are now somewhat expensive again in relative terms and the economy is significantly more robust compared to Europe.
After a turbulent roller coaster ride, we are also closing our underweight in commodities, as supply concerns are again at the forefront and China is sharply increasing infrastructure spending.