Bernie Ahkong
CIO O'Connor Global Multi-Strategy Alpha
Shanghai skyline

September saw the first Federal Reserve (Fed) rate cut since July 2019, and it was a notable cut at that of 50bps. Rate cuts of 50bps typically occur close to recessions, so we believe it is unusual that the Federal Reserve Open Market Committee and general consensus continue to discuss a strong economy. As shown in Figure 1, when looking historically at how different factors and markets perform following a first Fed rate cut, performance is mixed. Ultimately, performance is dependent on how the economy progresses after the rate cut and whether or not there is a recession.

Figure 1: Global equity market internals favor Cyclicals and Growth when no recession, but Small Caps only tend to perform in line

Factors/Style 
(% chg)

Factors/Style 
(% chg)

-3m1

-3m1

-1m1

-1m1

+1m1

+1m1

+3m1

+3m1

+6m1

+6m1

+12m1

+12m1

Avg +12m; 25bps or lower

Avg +12m; 25bps or lower

Avg +12m; 50bps or more

Avg +12m; 50bps or more

No Recession avg +12m

No Recession avg +12m

Recession avg +12m

Recession avg +12m

Hit ratio (+12m)

Hit ratio (+12m)

Factors/Style 
(% chg)

Growth

-3m1

-2.1%

-1m1

-0.3%

+1m1

0.6%

+3m1

3.6%

+6m1

5.0%

+12m1

6.5%

Avg +12m; 25bps or lower

14.9%

Avg +12m; 50bps or more

-0.2%

No Recession avg +12m

16.3%

Recession avg +12m

-5.7%

Hit ratio (+12m)

56%

Factors/Style 
(% chg)

Value

-3m1

-1.0%

-1m1

-0.6%

+1m1

0.9%

+3m1

3.1%

+6m1

3.6%

+12m1

1.6%

Avg +12m; 25bps or lower

6.5%

Avg +12m; 50bps or more

-2.2%

No Recession avg +12m

9.1%

Recession avg +12m

-7.7%

Hit ratio (+12m)

44%

Factors/Style 
(% chg)

Growth-Val

-3m1

-1.1%

-1m1

0.3%

+1m1

-0.3%

+3m1

0.5%

+6m1

1.5%

+12m1

4.9%

Avg +12m; 25bps or lower

8.4%

Avg +12m; 50bps or more

2.1%

No Recession avg +12m

7.2%

Recession avg +12m

2.0%

Hit ratio (+12m)

 

Factors/Style 
(% chg)

Size

-3m1

-2.4%

-1m1

2.3%

+1m1

0.4%

+3m1

2.1%

+6m1

1.7%

+12m1

0.1%

Avg +12m; 25bps or lower

13.1%

Avg +12m; 50bps or more

-19.5%

No Recession avg +12m

13.1%

Recession avg +12m

-19.5%

Hit ratio (+12m)

40%

Factors/Style 
(% chg)

MSCI World

-3m1

-2.0%

-1m1

-0.5%

+1m1

0.1%

+3m1

0.6%

+6m1

3.9%

+12m1

6.1%

Avg +12m; 25bps or lower

12.4%

Avg +12m; 50bps or more

2.6%

No Recession avg +12m

14.3%

Recession avg +12m

-3.6%

Hit ratio (+12m)

73%

Factors/Style 
(% chg)

Small-Large

-3m1

-0.3%

-1m1

2.8%

+1m1

0.3%

+3m1

1.5%

+6m1

-2.3%

+12m1

-6.1%

Avg +12m; 25bps or lower

0.7%

Avg +12m; 50bps or more

-22.1%

No Recession avg +12m

-1.2%

Recession avg +12m

-15.8%

Hit ratio (+12m)

 

Factors/Style 
(% chg)

Cyc 

-3m1

-1.0%

-1m1

0.3%

+1m1

-0.3%

+3m1

0.0%

+6m1

0.6%

+12m1

3.7%

Avg +12m; 25bps or lower

10.7%

Avg +12m; 50bps or more

-0.9%

No Recession avg +12m

9.5%

Recession avg +12m

-2.1%

Hit ratio (+12m)

70%

Factors/Style 
(% chg)

Def

-3m1

-0.4%

-1m1

0.1%

+1m1

0.5%

+3m1

1.4%

+6m1

2.3%

+12m1

3.8%

Avg +12m; 25bps or lower

5.9%

Avg +12m; 50bps or more

2.4%

No Recession avg +12m

6.6%

Recession avg +12m

1.0%

Hit ratio (+12m)

80%

Factors/Style 
(% chg)

Cyc-Def

-3m1

-0.6%

-1m1

0.3%

+1m1

-0.8%

+3m1

-1.3%

+6m1

-1.6%

+12m1

-0.1%

Avg +12m; 25bps or lower

4.8%

Avg +12m; 50bps or more

-3.3%

No Recession avg +12m

2.9%

Recession avg +12m

-3.1%

Hit ratio (+12m)

 

Source: LSEG Data & Analytics, Bloomberg, Barclays Research as of September 2024.

1. Average performance post first Fed rate cut since 1971

Recent sector performance post-rate cut

Historically, Defensives have been one of the few areas to have posted positive performance in both a recession and no recession scenario, and we have recently seen significant outperformance from this sector. This is seen by several members of our investment team based on feedback from company meetings and industry datapoints. Additionally, Telecommunications, Utilities and Healthcare are seeing cashflow expectations improve, while also being lifted by lower bond yields. By contrast, general estimates for Cyclicals in 2025 have asymmetric downside risk given a weaker than expected finish to 2024 from China and Europe, with pockets of the US slowing down as well as slowing pricing growth.

Portfolio update

Overall, performance was more challenging in September compared to other months this year, given the defensiveness of several areas of our portfolio, the choppiness of markets in the first half of the month (as shown in Figure 2), the outperformance of lower quality and weaker balance sheet companies and a mark down in some legacy positions (largely driven by one position which, in our view, relates to a financing need rather than impairment of the business). We have seen strong performance from our China strategies where our team leveraged their local insights to position ahead of the crowd, and we increased capital intra-month given our conviction and the opportunity set. Our strategies remain diversified and uncorrelated from one another, and now that we are past the Fed meeting and are entering earnings season, we expect to see a more idiosyncratic backdrop with greater dispersion in October. After US elections, we expect significant policy variation to drive multi-week themes and re-ratings, during which we look to take advantage of opportunities that we see. Finally, we continue to increase exposure in our EM strategies where we observe diversified macro drivers and dynamics – for instance the Brazilian central bank raising rates at the same time as the Fed cuts rates – leading to less crowding and a richer structural alpha opportunity set.

Figure 2: Weekly moves in SPX for first half of September

Date

Date

Percentage change from previous week

Percentage change from previous week

Date

Fri, 06 Sept. 2024

Percentage change from previous week

- 4.25%

Date

Fri, 13 Sept. 2024

Percentage change from previous week

4.02%

Source: Bloomberg as of September 2024.

C-10/24 OCCRVC-2040

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