Volatility in the markets has been driven by a trifecta of recent data and news over March 1 a repricing of Fed rate cuts to adjust to the new “higher for longer” interest rate regime, 2 geopolitical tensions have been rising, especially in Middle East and Taiwan and 3 the S&P 500 first quarter earnings season is underway with outlooks softer than expected.
With US Treasury yields moving higher and US stock market indexes moving lower, the magnitude of the pullback has been contained Has the tone in equities really shifted? Corrections in the 5 10 range are typical in any given year. Can we experience a deeper or more prolonged bear market environment? We do not see this as a high probability outcome Bear markets tend to usually occur when an economy is or about to enter in a recession or when the central bank is hiking rate : we see neither of those conditions in place today.
We highlighted last month that the current environment was ripe for some consolidation, even some profit taking, arguing the equity risk premium was leaving no room for disappointment over consensus expectations of disinflation. The scenario occurred but the safe haven asset was not the US Treasuries but Gold, which reached new highs, before receding on geopolitical ease.
While duration and magnitude of any correction is often difficult to predict, period of volatility should be considered as a good opportunity to rebalance, diversify and add quality investments at better prices ahead of a potential recovery period partly driven by lower rates to come.
With global economy activity showing favourable signs but the short term outlook for the markets having deteriorated, market participants are currently reassessing monetary and geopolitical risks Thus, we neutralised our Gold exposure on increasing geopolitical risk.
The US equities still have more potential than other markets owing to 1 re shoring, which is supporting growth, businesses and employment, 2 AI which is increasing business productivity more than in other countries and 3 increased military spending worldwide which should benefit them The Swiss equity market remains a defensive exposure.
Thus, we took advantage of market volatility to sell our Reverse Convertible, which was trading far out of the money, and reinvest part of the proceed in an ETF invested on the S&P 500 keeping our overall equity exposure to neutral. We favour Investment Grade corporate bonds’ exposure and highlight a preference for selected capital structures CrossOver bonds offer attractive risk/reward.
