Market Insights - April 2, 2024

The SNB launches a new rate cutting cycle.

The SNB took everyone by surprise when it became the first to cut its policy rate. Other central banks are expected to follow suit in the months ahead, and the current round of monetary policy tightening has officially come to an end. The rate cuts to come – which are only possible because inflation has dropped sharply over the past 15 months – could pave the way for the start of an economic recovery in H2, with growth then picking up in 2025. Consumer spending will be the first to benefit from this. Unemployment is close to its all-time lows across the board, which should reassure consumers, prompting them to make the most of their new-found purchasing power and the savings built up during the pandemic, which most households – except those in the US – haven’t fully spent. What’s more, businesses have low debt levels on average and may want to use this opportunity to start investing again. This suggests that manufacturing should also pick up after two very tough years.

The upcoming monetary policy loosening will of course be a boon for bonds. That said, we still think equities will continue to outperform bonds despite the recent stock market rally. Stocks usually do well when the economy is picking up and monetary policy is being loosened. There’s therefore a big chance the current uptrend will continue. Investors have already revised down their expectations from earlier this year, particularly when it comes to monetary policy, and this hasn’t really affected the markets.

We’re increasing our overweighting on equities in light of the uptrend started in recent months. For balanced investment profiles, we’ve increased exposure to US stocks by 2 percentage points, with total equity exposure now at 44%. We’ve also increased gold’s weighting to a total of 5 percentage points, as it’s being buoyed by the prospect of rate cuts and by central banks’ moves to diversify their foreign exchange reserves. Increasing our exposure to gold also provides some portfolio protection at a time when geopolitical tensions are still running high. In our CHF portfolios, we’re reducing our exposure to the franc, which the SNB seems set on weakening. After increasing exposure to the euro a few weeks ago, we’ve now upped our exposure to the US dollar (by 2 percentage points).

Japan – what’s next after the end of negative rates?

The Bank of Japan (BoJ) recently ended its ultra-accommodative monetary policy. Gone are the days of negative interest rates, yield curve control and purchases of stock market ETFs. While the Swiss National Bank (SNB) took everyone by surprise by being the first central bank to cut interest rates, the BoJ has embarked on the opposite path. However, Japan’s monetary tightening is proving to be more gradual than expected, with the BoJ maintaining its bond purchasing programme in order to keep financial conditions favourable. The yen had been expected to appreciate but instead remains flat for the moment, mainly due to the Fed’s delay in loosening its monetary policy. However, the interest rate differential between the two economies should narrow, which is likely to strengthen the yen in the months ahead. Meanwhile, corporate governance reforms have led to better payouts to shareholders and a focus on profitability, which has helped to increase investors’ interest in this market, offsetting, for the time being, the risk of a correction that could be triggered by a stronger yen. That’s why investors are bullish on Japanese stocks even though valuations are relatively high. Now the BoJ will need to carefully navigate the divestment of the ETFs it holds as a vestige of its quantitative easing in recent years – it still owns nearly 7% of the country’s total market cap.

This week’s figure : 50.3

In the US, the manufacturing purchasing managers’ index went from 47.8 to 50.3 in March, the first time it’s been in expansion territory since September 2022. New orders were also up, suggesting the upward trend should continue.