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Aggressive interest rate hikes—how are markets reacting?
Several central banks have aggressively hiked interest rates. This policy tightening is likely to continue over the coming months—until the guardians of the currencies see that prices are stabilizing once again. But there are also more hopeful signs: Inflation may peak soon. In addition, the Chinese economy is gradually opening up.
Even so, it’s not enough—more will be needed before the situation returns to normal. However, we are cautiously optimistic. We are not expecting a broad-based, global recession in the next 12 months and are adjusting our portfolio slightly.
How we position ourselves strategically: The monthly CIO Update analyzes the current market environment and and presents the backstories. Presenters are Dan Scott, Head Multi Asset, and Michaela Huber, Investment Strategist.
If we take a look into the immediate future, we see an aggressive, so-called “front-loaded” tightening cycle. We expect the Fed Fund Rate to be at around 3.5 percent by year-end. Other central banks will also raise rates, as the SNB did recently.
The steps which have been taken so far are beginning to have an effect. For example, US consumers’ long-term inflation expectations have been adjusted downwards to 3.1 percent. Taken together with the opening up of the Chinese economy, that offers a bit of hope. But further progress is needed. Supply chain bottlenecks need to ease, energy prices must not go higher, and central banks’ actions need to curb demand further.
What does this mean for our positioning? In May, we raised government bonds from neutral to positive; now, we upgrade investment grade bonds to neutral and reduce high yield bonds to negative. This is due to our belief that high-quality credit should fare better than lower-quality credit when economic growth comes down.
While we still see select pockets of growth for equities, we maintain our neutral view for the time being. We need to see further signs of improvement, e.g., with regard to China’s reopening, before increasing our exposure again.