Investors’ Outlook: Eyes on the end zone

US inflation kicked off the year stronger than anticipated, pouring cold water on investors’ eager wait for the Fed’s (and other central banks’) turn on interest rates. Fed Chair Jerome Powell previously made it clear that he’s in no rush to slash rates just to fumble and risk inflation inching back up.

The market was probably overly optimistic in pricing in rate cuts as early as March, leading to the disappointment reflected in the recent market volatility. But inflation is still on a downward trend, and the world’s biggest economy is – against all odds – far from being “benched”. We continue to follow the economic data out of the US, especially as headline numbers veil the underlying signs of potential weakening and think it’s important to drown out the noise.

So, while one of the main topics for investors may now be the guessing game of when the first cuts – and how many – will occur, we believe the best course of action is to keep on moving the ball forward through the volatility that is poised to accompany the next few months by focusing on asset allocation and staying flexible. After all, the question is no longer if, but when rates come down; it’s in the line of sight. Investors should resist being distracted by shorter-term volatility and focus on what their portfolios should look like, so they can be on the receiving end when conditions change.

In a scenario with relatively robust growth and moderating inflation, risk assets should be well-supported. At our last Investment Committee meeting, we decided to upgrade European equities as we believe that notoriously unloved Eurozone stocks may be poised for a recovery as the year progresses. That brings our overall position in equities to slightly overweight from neutral. In turn, we decided to reduce our exposure to commodities to underweight from neutral amid a mixed picture for global growth and our expectation for further moderating inflation.

We believe there is too much euphoria in bond markets and hardly any spreads for high-yield and investment-grade credit. We think it makes sense to stay defensive and see risk balanced in equities, which aren’t overly expensive. The market could move higher, and there is more than 6 trillion US dollars of liquidity in money market funds.

In this Investors’ Outlook, we take a closer look at whether China faces the same fate as Japan did in the 1990s, Vontobel’s boutique heads’ takes on quality investing, and our views on what the various rate cut expectations mean for currencies amid diverging economic signals.

The absence of a US recession doesn’t necessarily mean that the Fed will refrain from cutting interest rates. Easing inflation may soon be enough reason to cut.

The journey may not be as swift as many investors had hoped, but we keep our eyes on the end zone.