Moving towards mid-cycle type exposure

01 November 2021

As a strong reporting season continues, Chief Investment Officer Bernard Swords discusses the momentum in equity markets in today’s Market Pulse as well as expectations of an interest rate increase being brought forward.

  • October was a very strong month for equity markets but there was a large regional bias. Developed Markets did far better than Emerging Markets. Some of this is due to the uncertain outlook for China both in terms of growth and policy and some of it is due to sporadic lockdowns due to the pandemic.
  • The most striking feature over the last week was the movement in longer dated bond yields in the US and the euro area. For maturities between zero and ten yields there was still upward pressure on yields but at maturities of 20 years and more yields declined by 15bps in both regions. This was driven by expectations of interest rate increase being brought forward into 2022 – we think this is too aggressive. 
  • For equity markets it does re-enforce the need to be moving towards mid-cycle type exposure. While October was a month for cyclical exposure, that did fade during the last week and one saw the higher rated parts of the equity market beginning to perform, quicker than we would have expected. Last week reinforces the view that we should keep our portfolio preferences biased towards structural and sustainable growth (Healthcare, IT, Services, Consumer) and away from companies and industries that are reliant on the level of economic growth (such as Materials, Manufacturing).
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