Markets unfazed ahead of tariffs

Meanwhile, the impact of tariffs takes longer to play out than initially thought and the world economy, although slowing, remains resilient. But more tariffs might be on their way. For now, this does not affect our positioning. We remain neutral towards equities and moderately positive on bonds, with a preference for high-quality bonds. Additionally, we are slightly reducing the interest rate sensitivity (duration) in the bond portfolio.

July has historically been favourable for equity investors, and this year is no exception. Especially in the US, the recent rally has led to valuations reaching expensive territories again. This rally has been supported by a combination of hard data softening, but holding up better-than-expected, soft data strengthening, and recovering earnings growth expectations. The world economy is proving to be remarkably resilient. Meanwhile, the ongoing Q2 earnings season will provide valuable insights. Especially the forward-looking guidance of companies will interest investors.

However, potential risks loom. Firstly, the new tariff deadline in August approaches while investors continue to expect trade deals or further deadline extensions. Negative surprises on this front could unsettle markets. Secondly, especially the US stock market is currently overextended so a correction could occur. The combination of these risks with resilient underlying fundamentals makes us comfortable with our neutral position on equities, while we also remain neutral on our regional allocation. However, we remain vigilant. Market corrections could prove to be attractive entry points to increase our equity weight.

We lowered the interest rate sensitivity (duration) in the bond portfolio further. Investors benefit from a higher duration when yields fall. Our profit-taking is based on the fact that the yields on long-term bonds moved less than initially expected. The easing by the European Central Bank (ECB) was negated by upcoming fiscal stimulus in Europe, such as ReArm Europe and the German defence and infrastructure spending. Nevertheless, we retain a slight overweight duration. We acknowledge that the ECB is reaching the end of this rate cutting cycle and the yield curve is upward sloping again, which means that longer maturity bonds receive higher yields. With inflation expected to surprise on the downside next year, odds are a bit higher for yields to fall than for yields to rise from here, which justifies our modest duration overweight. Other than that, we made no changes to the bond portfolio and remain cautious on high-yield bonds, which we view as too expensive.

Financial markets have shown optimism. Especially, the US stock market has recovered strongly and reached new all-time highs. We have a neutral view on equities at current valuations, but we would see a market correction as a possible entry point to increase our equity weight as long as other fundamentals remain supportive. For bonds, we remain enthusiastic about high-quality bonds over higher yielding riskier bonds. Finally, we reduced the duration in the bond portfolio slightly as we are nearing the end of the ECB rate cutting cycle.

Johanna Handte
Acting Chair Global Investment Committee