The global financial landscape is preparing for the impact of upcoming elections, causing asset managers to adjust their strategies to navigate potential volatility.
The Japanese yen (JPY) is currently favored due to favorable valuations and expectations of a more restrictive monetary policy from the Bank of Japan (BoJ).
The Swiss franc (CHF) is approached with caution due to the Swiss National Bank's (SNB) accommodative stance and the currency's expensive valuations.
Emerging market currencies present a mixed picture, with a neutral overall signal. However, specific currencies like the Brazilian real (BRL) and South African rand (ZAR) are viewed positively for their carry potential, while Asian currencies are underweighted due to customs risks.
The geopolitical landscape, particularly the ongoing conflict in the Middle East, is not expected to significantly disrupt oil supply, keeping Brent crude prices stable between USD 70 to 80.
Stimulus measures in China are anticipated to provide less support for base metals than in previous cycles, reflecting a cautious outlook on commodities.
In terms of equity markets, there are diverging trends in global performance. The prevailing sentiment leans towards an overweight position, driven by a positive economic environment and robust earnings potential.
U.S. equities are expected to perform relatively well compared to the rest of the world, given their strong earnings profile and lower exposure to manufacturing.
European equities are underweight due to disappointing economic indicators and ongoing challenges within the manufacturing sector.
Japan's equity market holds a neutral stance, buoyed by corporate reforms and solid earnings, yet tempered by the renewed strength of the yen.
Emerging markets are viewed with optimism, as positive earnings and a political turnaround in China suggest potential for further upside, although the risk of tariffs under a potential Trump administration looms large.
The fixed income landscape presents a nuanced outlook. Global government bonds are rated neutral as improved valuations enhance the attractiveness of duration.
However, a decisive Republican victory in the elections could trigger a sharp rise in yields, driven by concerns over budget deficits and increased tariffs.
U.S. Treasuries are also rated neutral, with easing inflation potentially offsetting strong growth and the risks associated with wider budget deficits.
In Europe, Bunds and Gilts are viewed positively, reflecting continued weak growth and slowing inflation.
Conversely, Japanese government bonds are underweight, as rising wages and core inflation suggest an over-expansionary monetary policy is being priced in.
Swiss government bonds are similarly underweight, influenced by currency-driven disinflation and relatively high valuations.
The outlook for global corporate bonds remains neutral, with the risk-return profile not particularly attractive, especially in the U.S. where spreads are nearing cycle lows.
In contrast, European and Asian high-yield bonds offer better carry opportunities, reflecting a more favorable risk-adjusted return profile.
Investment-grade corporate bonds also maintain a neutral stance, as spreads hover around typical cycle lows, with solid corporate fundamentals underpinning yields driven primarily by carry.
High-yield bonds in the U.S. have seen spreads fall below 300 basis points, attributed to solid growth and declining funding costs, suggesting a carry-driven return environment.
However, European and Asian high-yield bonds are highlighted for their more attractive valuations, indicating a potential shift in investor focus towards these markets.
Emerging market bonds in hard currency are currently rated neutral, with short-term risks stemming from the U.S. election potentially weighing on performance.
A stronger U.S. dollar and rising U.S. yields could increase financing costs for these markets.
Nevertheless, many emerging market issuers continue to benefit from solid credit fundamentals, suggesting a more favorable medium-term outlook.
In the currency markets, the U.S. dollar is positioned overweight, buoyed by the continued outperformance of the U.S. economy. This presents an attractive hedge for global portfolios against potential tariff risks.
Conversely, the euro is underweight, as relative interest rate differentials are expected to favor the U.S. dollar moving forward.
As the financial markets navigate political uncertainty and economic dynamics, asset managers are strategically positioning themselves to capitalize on opportunities while mitigating risks across various asset classes. The interplay between currencies, equities, and fixed income will be critical in shaping investment strategies in the months ahead.