Turnaround in equity and bond markets
The first half of 2022 was tough and unparalleled in history. Both major asset classes, equities and bonds, closed it with a hefty loss. However, in the second half of June, the sun began to shine through the dark clouds. Finally, in July, the long-awaited countermovement on the stock and bond markets began.
What were the triggers for the turnaround? From our perspective, investor sentiment played an important role. Many indicators we monitored pointed to exaggerated pessimism. This increased the probability of a countermovement starting soon. It remains to be seen whether this is merely a bear market rally or whether a new long-term upswing is imminent.
Expectations tip the scales
The markets are always one step ahead of events in the economy and central bank policy. This is shown by the positive stock market development in view of the strong interest rate hikes in the USA and Europe. It is not what happens today that counts, but how expectations change for tomorrow. Here, market participants' expectations may have been too negative.
With our neutral equity weighting, we were well positioned and with a broader upswing in the stock market, our outlook is becoming more optimistic. However, we still lack the decisive data points for an additional move into equities.
Central banks as market drivers
As stock prices turned upward, so did bond prices - an interesting phenomenon. Again, a synchronization, this time in the more pleasant direction. In the past, strong interest rate hikes by central banks led to a weakening of the economy and declining inflation figures. This scenario has been priced in more strongly by the market over the past few weeks.
In mid-June, we increased the remaining maturities of our EUR and USD bond strategy at an optimal time. Again, it was investor sentiment that was the deciding factor for us. Of course, catching exactly the perfect day was pure luck.
The extent of the market movements is astonishing. For example, the yield on 10-year German government bonds fell from over 1.7% to below 1.0% in just a few weeks. By extending duration, we benefited additionally from this development.
Balance in the portfolio
The current motto of our portfolio strategy is balance. In equities, the focus is on high-quality business models that have pricing power in this inflationary environment. In the fixed-income strategy, we deliberately rely on hyper-diversification - no single security determines the success or failure of the strategy.