Position for lower rates
With economic growth and inflation slowing, central banks have started cutting interest rates. Investors should move out of cash and position in the beneficiaries of lower rates across bonds and stocks.
We think investors should invest cash and money market holdings into high-quality corporate and government bonds, where we expect to see price appreciation as markets start to anticipate a deeper rate-cutting cycle. We also expect broadly diversified fixed income strategies to perform well in the months ahead.
Manage liquidity
Manage liquidity
Current returns on cash will not be available for much longer if central banks continue to cut rates. Investors holding cash or money market funds (or those with expiring fixed-term deposits) need to manage their liquidity accordingly. For expected cash requirements over the next one to three years, we think bond ladder strategies can help investors retain attractive yields. For cash currently earmarked for longer-term spending needs, investors should consider structured investment strategies that provide exposure to market gains alongside a degree of capital preservation.
Buy quality bonds
Buy quality bonds
Investors could also deploy cash into high-quality corporate and government bonds, which have attractive yields and the potential for capital appreciation if markets start to price deeper rate cuts. This also applies to sustainable investments into green, social, and sustainable bonds, as well as those issued by multilateral development banks. We prefer medium-duration bonds with a maturity up to 10 years, as we think concerns about the high US debt burden and loose fiscal policy may pose a risk for longer- duration bonds. In our base case, we see the 10-year US Treasury yield falling to 3.85% by the end of this year, from around 4.2% at the time of writing.
Diversified fixed income strategies
Diversified fixed income strategies
A combination of lower interest rates and still-positive economic growth should also be supportive for diversified fixed income strategies. And complementing core quality bond holdings with satellite exposure to riskier credits, such as emerging market bonds, can improve overall portfolio yields. Selectivity and diversification are important, given tight spreads and potential idiosyncratic risks. Active approaches may offer higher potential returns thanks to their ability to take risk-controlled exposure to higher-yielding parts of the fixed income market, which may be harder for individual investors to achieve.
Lower rates can also benefit select equities
Lower rates can also benefit select equities
We see opportunities in EMU small- and mid-cap stocks, EMU consumer stocks, including parts of the luxury sector, the UK market, and select US housing stocks.
