The ECB towards a rate cut: where is it best to invest? The interview with Alessandro Fugnoli, Kairos strategist
Everything is ready for the rate cut ECB. Barring dramatic changes in direction, tomorrow, Thursday 6 June, the reference rate will be reduced by 25 basis points, passing from 4.5% to 4.25%. At this point, where is it best to invest? How to get your wallet? Gold, raw materials, private assets or shares? To understand more, toffaritaliani.it he asked Alessandro Fugnoli, financial strategist Of Kairos Partners, a group specialized in the asset management sector.
After much waiting, on Thursday 6 June, the ECB will announce the cut in interest rates. A “fundamental” appointment for professionals (and not only). Why?
It is important because it is the first cut by a major Western central bank (ECB, the Bank of England and the Fed). A cut that was announced some time ago and which has been discounted and incorporated into prices for several months. This cut was practically promised to governments and markets, but then it happened that European inflation started to rise again and European growth was higher than what was thought and a priority part of the market therefore began to ask itself whether the cut is not premature.
In light of what has happened in recent months it would seem less justified. Reaching consensus in a central bank made up of countries with different economies and needs is challenging, it would be complicated to call it into question at this point. However, markets have adapted in recent weeks to this new reality of recovering inflation, causing some yields to rise on the long end of the curve.
The problem now is to understand whether there will be other cuts immediately or whether there will be an internal discussion within the ECB between divergent positionslike that of France, which wants more cuts, or the Dutch and German one which waits for inflation to fall before proceeding with further adjustments.
What is the impact of the rate cut on investment decisions?
Portfolio repositioning happens when there is something unexpected. By the time something obvious happens, the adjustment has usually already occurred. However, since the picture has become uncertain again after this cut, what should determine the portfolio shifts are any subsequent downward movements.
In theory, if this cycle of cuts continues, they should benefit high duration securitiesand therefore the long part of the yield curve and, in equities, technology stocks.
However, we will have to see how inflation really behaves, in particular the European wage one. If the market were to think that the ECB risks being positioned behind the curve, i.e. due to a decline in inflation which in reality is not there, then the market could have less certainty about the central bank’s ability to fight inflation. This would penalize long duration securities
Why is there this uncertainty on the part of the markets?
For the moment, the markets are struggling to understand well what situation we are in: that is, whether we are in an inflation paradigm that will remain permanently above 3% or whether instead inflation has only temporarily risen and will fall again. They also ask whether we are in a solid growth paradigm or whether it is slowing down. But for the moment this uncertainty does not translate into high volatility, but into a certain underlying nervousness.
So, where is it best to invest and how should you reposition your portfolios?
In practice, everything depends on the paradigm you adopt. Our hypothesis is that growth will resume in Europe and inflation will struggle to return to 2%. This is a paradigm that would favor the stock market over bonds.
Other hypotheses circulating in the markets are the so-called “Goldilocks”, which means that everything is fine but not excessively good, and that it would be positive for all financial assets. If, however, inflation were to remain high and growth to resume, we would be in the paradigm of an inflationary boom, in which the stock market does better than bonds, because there is growth and long bonds are penalized by the persistence of inflation.
And is there room in the portfolio for gold and AI?
Even for gold it depends on the vision you adopt. For the moment it has stabilized, it too suffers from the general uncertainty, however it benefits from the continuous purchasing flows from Asia, China and several central banks that support its price. If it were to fall it would offer an accumulation opportunity for all investors.
AI has already been discounted a lot in prices and the prices are quite high, even if not comparable to those of 2000 and the internet bubble. At the moment the market is trying to support the producers of artificial intelligence with the service providers that make it possiblesuch as electric utilities.
What advice do you have for investors?
In this very uncertain context, it is prudent to overweight the short part of the curve compared to the long part, unless American growth really shows clear signs of slowing down.
As far as stocks are concerned, it may be appropriate to reduce the weight of the United States, on which all the markets’ attention has been focused in recent years, and move to Europe and, with a certain caution, also on the rest of the world, while remaining very attentive to what happens on the inflation and growth fronts.
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