The most important central bank in the world, the Federal Reserve of the USA, has announced a historic decision as a result of its FOMC meeting on 20 September: the central bank balance sheet, hugely inflated in the wake of the bond purchase program, will be gradually reduced from October onwards. Generally speaking this is a good sign, as the decision can be seen as further testimony to the normalization of the economic environment.
The bandwidth of the Fed funds rate has been left unchanged at 1%-1.25%.The forecasts by the Fed suggest a gradual increase of inflation to 2% by 2019. This would theoretically require two and a half Fed funds rate hikes to 1.8% in order for the real Fed funds rate to remain unchanged. In fact, the Fed is even more optimistic: for the end of 2017, it still predicts 1.4% (one interest rate hike), and for the end of 2018 already 2.1% (three further hikes). This implies the assumption that the neutral interest rate will also rise a bit (from currently -0.22% to 0%).
The basic positioning of the funds has temporarily shifted towards the more cautious end. The risk on the equity markets is currently elevated. This has several reasons. Discussions about a more expansive stance of the central banks are imminent. This means that the bond purchase programme by the Fed and the ECB could be reduced in the foreseeable future. Also, the political conflict potential has increased: the situation in the USA has not exactly stabilised, and in Asia, the North Korea conflict is intensifying.
On the financial markets, the development of some currencies, i.e. the strength of the euro, is a big issue. Investors on the European equity markets are worried about negative effects on exports. The ECB expects lower inflation due to cheaper imports.
In the YOU INVEST funds, we have now slightly reduced the equity portion to 7%, 20%, and 35% for the respective risk profiles (“solid”, “balanced”, and “progressive”). The freed-up capital was partially funnelled into the money market and partially invested in US corporate bonds. We have also become more cautious within the equity segment in that we have slightly expanded the share of the developed markets and taken China and East European countries out of the portfolio. Only Russia remains in the equity mix as complementary investment. We remain positive about the US yield curve, where we prefer especially corporate bonds from all rating segments and mortgage bonds.
The most recent weakening of the US dollar is making us cautious about currencies as well. About half of the dollar position will remain hedged in the equity segment. We are even more conservative with regard to the British pound, where we are hedging the entire position.
The high on the global capital markets has continued to grow now that the political uncertainty in France is over. European stocks in particular continued their positive development. US stocks, which have generally performed better than European instruments in recent months, are also in the positive range, though behind the Eurozone markets.
Positive economic developments are driving the good mood on the stock exchanges. These developments are fairly well synchronized and are picking up speed in the Eurozone in particular. The pro-business measures planned in the USA appear to have a good chance of actually being implemented. This would primarily be of benefit to corporate profits in the USA.
The higher returns on government bonds in the Eurozone are the only negative aspect of these developments. These higher returns have been accompanied by corresponding falls in prices. The asset classes of corporate bonds and bonds from emerging nations have, however, been able to avoid this trend.
In the YOU INVEST Fund we have been able to benefit from the good performance of the stock markets, corporate bonds and emerging markets. The negative developments in government bonds have had only a peripheral impact.
The proportion of stocks has increased slightly over the past few days and is now at around 85% of maximum possible weighting levels. By contrast, corporate bonds in the lower rating segments in Europe have been reduced. These had previously performed very well. Government bonds in emerging nations were also reduced in favor of corporate bonds in these countries. The risk of higher returns in the USA could also be a negative factor for government bonds from emerging nations
The elections are over. The next President of France will be Emmanuel Macron. This strengthens the camp of the liberal EU supporters. What does this result mean for the capital markets?
The elections in France took place against the backdrop of a cyclical upswing in the Eurozone. Experts expect economic growth of 2.1% for 2017 after 1.7% last year. In France, too, numerous economic indicators suggest an acceleration of real economic growth. However, France continues to grapple with its structural problems, f.e. the unemployment rate (10%). The next hurdle Macron has to clear are the parliamentary elections in France on 11 and 18 June. It is questionable whether Macron’s new movement can achieve a majority.
The combination of good economic indicators, a decrease in concerns over a possible break-up of the European Union, and hopes for reforms in France and the EU is positive for risky assets such as equities.
Economic growth in the Eurozone has embarked on a clear upward trend. At the same time, the fear of falling wages and prices has disappeared for now. The worries over a possible break-up of the European Union have also eased. Against this backdrop, the ECB President Draghi issued a slightly more optimistic growth forecast yet again on 27 April at the press conference of the European Central Bank. This is another tiny step indicating a possible reduction of the monetary support in the medium term.
Which conclusions can be drawn from this for the allocation?
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