Mr. Chetouane, the Santa-Rally already started at the beginning of November this year. Will it even last past the turn of the year?

The key factors for the markets are the Fed’s future key interest rate decisions in the US and the hints in the central bank’s communications. Following the latest statements by some representatives of the central bank, the probability of a first rate cut in March 2024 has risen to almost 60% and is over 90% priced in for the May meeting. We believe this is too optimistic. We do not expect an initial loosening of the monetary reins before the second or even third quarter of 2024.

So there is room for disappointment on the stock market?

Fed officials are of course continuing to buy themselves some time to make sure they make the right decision. The labour market is still buzzing and poses risks to the inflation outlook. Of course, the financial markets can be wrong and fail to anticipate monetary policy correctly. This has happened repeatedly. Currently, the key interest rate cuts are priced in too early. In this respect, we view the strong share price gains with some scepticism. We are currently keeping the weighting of equities in the portfolio at neutral.

Do you consider a year-end rally as unlikely?

The momentum on the markets will not persist. In November, the indices of the industrialized countries rose by an average of around 9%, which is unusual at this stage of the cycle. However, liquidity usually falls significantly in December. Market participants will also be increasingly cautious as they wait for clear indications of the monetary policy roadmap in the coming year. This lack of visibility will slow down the equity rally.

But it almost seems as if the stock markets are using every excuse to climb upwards?

This is exactly what makes us rather sceptical. A good example of this was the publication of the US inflation figures for October. Actual inflation was only slightly below the expected figure, but even this small deviation triggered massive movements on the financial markets. Long-term interest rates fell by twenty basis points on the same day and share indices shot up. Market participants simply want to interpret data releases positively. But there will also be disappointments.

Despite all the prophecies of doom, the US economy is proving to be extremely robust.

Once again, the growth figures have surprised on the upside this year. We assume that the US economy will avoid an outright recession, even if growth slows in the future. In addition, inflation figures are falling, which makes the Fed’s wait-and-see attitude possible in the first place. This is of course good news for the central bank and ultimately also for the markets.

How are the geographical weightings distributed within your equity allocation?

We invest our equity capital where we see the highest growth potential and that is clearly in the USA. We therefore prefer US equities to the European or Asian markets. Nevertheless, I must emphasize that the risk premium on the equity market is very low from a historical perspective and in relation to other asset classes.

Does the growth philosophy also apply to sector selection? Do you prefer growth stocks over value stocks?

Yes, we are also heavily invested in companies that can meet investors’ expectations for earnings growth. In this respect, we give preference to growth stocks.

Does this also apply to the highly valued US tech stocks?

The technology sector is still interesting for us, even in the European market. Valuations are of course ambitious, but if you are using this argument to avoid the sector, then you shouldn’t have been buying tech stocks over the past ten years. The stocks are usually expensive for good reason. Investors continue to expect high revenue and earnings growth and in the past this has been the case regardless of the valuation level. The Nasdaq 100 has gained around 47% this year.

Which other sectors are attractive?

In principle, sectors that benefit from the expectation of lower interest rates are interesting. These include utilities, but also consumer stocks in particular. Especially with regard to the USA, we expect consumption to remain an important pillar of growth momentum. The labour market continues to generate healthy wage growth and the savings from coronavirus times have not yet been fully exhausted. On the other hand, we are realizing handsome profits in bank shares. We will also tend to reduce our exposure to shares in energy companies.

Won’t consumer spending soon crumble under the burden of interest rates? After all, many Americans are buying on credit.

This should also become noticeable over time, but on the other hand the stock market is generating positive wealth effects for US households, which tend to be more invested in equities than Europeans.

The interest rate trend is a key factor for all asset classes. What is your view on the interest rate environment and the bond markets?

In the bond market, we position ourselves in such a way that we can benefit from the market’s interest rate cut fantasies. We therefore tend to prefer bonds with a long duration, as these react more strongly to a change in interest rates. If interest rates fall, the price of long-dated bonds rises quite significantly. We therefore tend to invest in maturities of seven to ten years and are underweighted in shorter maturities. However, we do this in stages, as the market is not very liquid in December.

However, the shorter duration bonds also generate a handsome return.

We will also build up exposure in the shorter maturities. As soon as the Fed’s and ECB’s round of interest rate cuts becomes clearer, there will be a rally at the short end of the yield curve. We will be there and give preference to US bonds, as the Fed can afford to cut the key interest rate sooner. The ECB will have to wait longer for inflationary reasons.

Do the high government deficits, the high volume of issues and the declining demand from certain countries not speak in favour of higher US long-term interest rates?

We are not worried about the high level of US government debt because the growth momentum is intact at the same time. In addition, the US government mainly issues government bonds with short maturities. We believe that demand for US debt securities will continue to match supply in the future. However, it is important to keep an eye on the declining demand from Japan. If Japanese funds are repatriated on a large scale, this could have a corresponding impact on US interest rates.

The ruling of the German Constitutional Court has made waves in the eurozone. Now there is suddenly a €60 billion shortfall in the federal budget. The country is already in recession. How does this affect your forecasts for the economy and financial markets?

We assume that the government will find a way to still be able to carry out fiscal spending. We have therefore left our forecast unchanged. It must also be taken into account that the Chinese economy, which is a major consumer of German goods, will at least stabilize in the coming year. On balance, this could prove to be a major support.

How do you assess investments in emerging markets?

We believe that emerging market bonds are attractive, especially those from Latin American countries that are strongly influenced by the dollar. We expect the Greenback to weaken, which will benefit emerging markets. In addition, some emerging market central banks have already started to cut their key interest rates again, which is boosting bond prices. On the equity side, we also consider investments in Latin America to be attractive. On the other hand, we are reducing our exposure to Asia.