A big step for the Fed and the market
Key Points
It´s the economy, stupid – The Fed finally joined the global rate cut bandwagon with a bang and opted for a 50 bp cut, a rare move outside of recessionary scenarios. As we still forecast a soft landing, this move is good news for investors. Historically, falling rates have been a tailwind for stocks in a non-recessionary environment.
How about the rest? – The impact of the rates cycle in the US has global implications as higher liquidity and a softer dollar is often a positive backdrop for equities. EM equities tend to generally perform well in a non-recessionary Fed cutting cycle –as do EU equities. The latter enjoy another tailwind as the ECB is cutting rates as well which historically propelled European equities higher.
A rotation towards normalcy? – While the last 12 months have been dominated by a handful of US mega cap stocks, a more balanced approach has historically produced more favorable results. We think that a combination of low starting valuations and a solid economic growth environment should be a fertile soil to re-establish this long-term trend.
In the sweet spot? – Mid-cap stocks have typically outperformed both large-caps and small-caps during the 12 months following the first Fed rate cut in an easing cycle
Main recommendations
Look for alpha in Japanese small caps as the stars align for further upside. Increasing real wage growth should lend solid support to small caps in general while a decreasing analyst coverage presents significant opportunity to add alpha in small cap selection.
Buy British – we reiterate our positive view on UK equities. We like the FTSE 100 for its diversifying characteristics and an attractive shareholder yield (c. 6%) while the FTSE 250 offers interesting exposure to improved UK economic momentum, pent-up demand from high household savings levels and falling interest rates.
Car crash – staying cautious on Automotives. We take the recent series of profit warnings as confirmation for our cautious view on the sector. The driving headwinds of rising inventories, unfavorable prix / volume mix and affordability issues should persist for the time being.
The key risks are that the market starts to reprice growth fears with central banks being perceived as “behind the curve”. Increasing policy uncertainty around tariffs could weight on sentiment, too.