Rigorous application of sustainability criteria tends to improve the risk-return ratio.
China at the heart of the news. China’s strict zero Covid policy is reaching its limits. Several cities are once more confined due to the sharp increase in the number of cases. However, the population seems to have lost patience and is increasingly expressing its dissatisfaction through protests once morest the measures. Nevertheless, we do not expect China to abandon its strict coronavirus policy soon. Supply chain issues therefore remain acute.
Inflation peaks. A shallow do not do the spring. Consumer prices certainly peaked temporarily in the USA in June, and this should soon be the case in Europe as well, but a return close to the 2% range, the target of the central banks, is unlikely. Currently, wages are rising sharply, which increases the risk of a wage-price spiral.
Monetary policy remains restrictive. Central banks are expected to raise key rates once more at the end of the year. We expect the US Federal Reserve (Fed), European Central Bank (ECB) and Swiss National Bank (SNB) to each raise interest rates by 0.5% in December. Global monetary policy remains tight until further notice.
Should we expect a year-end rally? From a seasonal point of view, the month of December is one of the strongest stock market months. However, equity markets have already priced in a number of things. Since mid-October, the MSCI World Index has risen more than 14%. Few elements argue in favor of a continuation of the uptrend, either fundamentally or in terms of technical analysis. The rally should once once more turn out to be just a bear market rally.
Defensive positioning. The persistent contrary dynamics in terms of monetary policy as well as the increased risk of recession call for caution. As part of rigorous risk management, we remain underweight in risky investment categories. This is true for both stocks and high yield bonds. The cash ratio remains high, as does the weighting in gold and Swiss real estate funds.
