• Financial markets' recession fears an overreaction
• Growth, low inflation and declining yields positive for equities
• Investment policy unchanged

August witnessed the largest equity pullback of the year, with the MSCI World Index declining by 6.4% in the initial trading days. However, market sentiment recovered, leading both global and U.S. stocks to end the month higher, approaching record highs. The MSCI All Country World Index gained 1.8%, bringing its year-to-date return to 16.8%,while the S&P 500 rose by 2.4%, up 19.5% for 2024. In contrast, the MSCI Japan was the biggest underperformer, falling 2.7% in August as investors faced a strengthening yen and the unwinding of carry trades. Stronger U.S. economic data suggested that concerns about a recession were overstated, with weak employment figures that can be partly attributed to disruptions from Hurricane Beryl. Other indicators, such as consumer spending, jobless claims, and GDP growth pointed to a soft- landing, which is consistent with our expectations. Moreover, the Federal Reserve signaled more clearly than before that rate cuts were imminent, with Chair Jerome Powell stating that the "time has come" for easing.

 

August was also a positive month for fixed income investors, with gains seen across the asset class. Other interest rate-sensitive sectors, like real estate, also performed well (Global REITs Index: 6.2%). Early-month volatility triggered a flight to quality, while ongoing concerns about the economic outlook prompted investors to anticipate more aggressive rate cuts from the Fed and other major central banks in the coming months. In this environment, the Bloomberg Global Aggregate Index returned 2.4% last month, as its yield declined by 14 basis points. After the 90-basis-point drop in the 10-year US Treasury yield since April, we see limited potential for further capital gains in our forecast horizon if the soft-landing scenario persists. While this remains our base case, extending duration beyond cash and locking in current yields in high-quality fixed income offers an attractive strategy to boost portfolio resilience against volatility and potential negative growth shocks.

 

While we view the broader environment as supportive for equities, uncertainty surrounding the economic and political outlook is likely to persist. We wouldn’t be surprised to see significant market volatility in the coming weeks, particularly ahead of the Fed’s September meeting and the presidential elections in November. Volatility could also arise from weak economic data that fail to alleviate concerns about a potential U.S. recession. Incoming data in the U.S. remain consistent with a step down in growth, not (yet) the start of something more ominous. We believe that the cumulative effect of upcoming central bank rate cuts will stop the slowdown by 2025 and provide a foundation for continued expansion. Our investment strategy remains unchanged.

Please find attached our last Asset Allocation Update for September.