Central banks no longer have any good reasons for keeping their monetary policy tight. In industrialised countries – and in most emerging markets too – inflation has continued to ease and is gradually returning to target levels. On top of that, although a global recession was avoided, growth has slowed quite sharply, meaning now would be a good time to gradually start making borrowing easier. That’s certainly the case in Europe, which has been hit hard by the war in Ukraine and the ensuing energy crisis. It’s also still true for China, where further stimulus measures are needed to shore up the construction sector in order to restore consumer confidence. The US could also do with a boost: the slackening jobs market, as reflected in the uptick in unemployment, could hurt consumer spending at a time when federal spending is also being reined in.
The synchronised loosening of monetary policy around the world could push down long-term bond yields and boost economic growth over the coming quarters. This climate will be a boon for risk assets, such as equities, which should continue to gain ground. That is, unless politics gets in the way. While it’s unusual for political events to have a lasting impact on the markets, political turbulence could spark bouts of stock market volatility. The busy elections calendar for 2024 has already brought some surprises, especially in France. For both France’s National Assembly election and the US presidential election in November, it’s not so much the names of the winners that worry investors but the programmes they’ll bring in, especially those that might involve protectionist measures or high levels of government spending.
Given this political uncertainty and the solid stock market performance recorded in the first half of this year, we’ve slightly reduced our exposure to European equities and increased our exposure to Swiss equities, which are more defensive – a useful feature during periods of volatility. We’re also taking some profits on the US stock market, which has recorded the largest gains since January. In CHF- and EUR-denominated investment profiles, we’ve reduced our exposure to the euro and upped our exposure to the Swiss franc. This tactical move, which was driven in part by the political climate, may turn out to be short-lived, however.
Investors reacted well to the results of the first round of France’s parliamentary elections. National Rally didn’t quite do as well as the polls had suggested they would, which means there’s less chance of them securing an absolute majority. We think the positive reaction on the stock markets, particularly among equities that are exposed to the French market, reflected investors’ relief that the worst-case scenarios involving large-scale government spending have been averted. It’s worth keeping in mind, however, that although no party is likely to obtain an absolute majority in parliament, there’s still a great deal of uncertainty about what the next government will look like. Volatility is likely to remain high until investors have a better idea of what policies that government will want to implement. In the medium term, we remain concerned about the potential for political deadlock and about the country’s deficit. We therefore recommend underweighting French equities, in particular domestic-oriented stocks.
This is how many yen you can currently get for a US dollar. The Japanese currency is now weaker than it was when the Bank of Japan intervened in the forex markets on 29 April.