A more balanced asset allocation

Investment Policy, September 2021

A more balanced asset allocation

Too good to be true – or at least too good to remain this way for long. This might be one way of describing the anticipation dilemma confronting stock markets. After all, it is quite possible that an almost perfect scenario is priced into many equity markets. For everything to look rosy on every front is known as the “Goldilocks” situation. And at the moment, equity markets are pricing in every possible ray of sunshine: inflation to come back to pre-coronavirus levels, earnings growth to become even stronger, interest rates to remain at very low historic levels, and economic growth to accelerate further. However, can all this really occur at the same time? It looks too good to be true. It therefore only makes sense to scale back the equity weighting somewhat.

If various leading indicators are to be believed, economic growth might now be passing its peak. US retail sales recorded a month-on-month decline in July, contrary to the expectation of the market, which had been anticipating a rise. Inflation and a more dangerous proliferation of coronavirus in the fourth quarter remain very real risks. (Even the spread of the Delta variant is not turning out to be as harmless as was initially suggested by the media.) In addition, the kind of earnings growth recorded in August is hardly likely to be repeated. While fears of stagflation may be exaggerated, even discussion of this issue could have an influence on markets, which have priced in an almost perfect scenario. In short, a more volatile phase in all financial markets – particularly equities – would not surprise us.


Equity markets have long since bounced back from the “pandemic slump”. US equities have risen by a staggering 100% from the correction level recorded in spring 2020 and are already some 30% higher than pre-crisis levels. The equivalent figure for European equities is around 25%. It is true that corporate earnings have improved more strongly than expected. The most recent quarterly results unveiled in the US and Europe reveal average earnings growth some 18% and 12% higher respectively than had been expected by analysts, and almost equate to a doubling of corporate profits year on year. However, earnings growth is likely to have reached its peak, and can therefore be expected to wane. Data for both the economy and companies is now so good that there is virtually no room left for positive surprises that have not already been priced in. However, disappointments could arise and affect equity markets, which are gradually looking “overbought” from a technical perspective. With this in mind, it could well make sense to take some profits after such a good run, i.e. reduce the equity overweighting somewhat.

The earnings growth of global companies could fall back again over the next few quarters.

Gérard Piasko, Chief Investment Officer


The European Central Bank (ECB) and its US counterpart (the Fed) are continuing to support bond markets with their purchases of government and corporate bonds. The likelihood of economic growth soon receding – not least due to resurgent proliferation and mutations of the coronavirus – could have the effect of supporting bond markets, thereby compensating for the inflation factor to a significant extent. It is also conceivable that inflation will reverse its current upward trend over the next few months, due to the base effect and seasonal factors. It is unlikely that further clarity will emerge in this respect before the year-end or even the first quarter of 2022. Corporate bonds continue to be overweighted due to their higher yields. Bonds may be more heavily weighted generally in the event of economic data losing some of its dynamism. We have adopted a neutral stance towards the high-yield segment. Unlike high-yield bonds, government bonds and even investment-grade corporate bonds can act as a certain hedge against equity market risks.


Ever since the Fed changed its guidance in the summer regarding possible increases in key interest rates in 2023, the US dollar has gained ground against the euro, as the ECB has stuck to its monetary policy based on record-low interest rates, thereby fuelling market anticipation of a widening interest rate differential. However, the US dollar has moved more or less sideways against the Swiss franc this summer, albeit with a fair amount of volatility. This is partly because the Swiss franc – just like the greenback – has been in greater demand in an environment of renewed uncertainties. In the medium term, however, rising US government debt and America’s balance of payments deficit should slow the dollar’s recovery. Overall, the pattern of greater volatility seen in other financial markets is likely to replicate itself in currency markets too in September/October.


The more economically-sensitive commodities such as industrial metals and crude oil have performed very well this year. But for the same reason, profit-taking in the fourth quarter is a clear possibility in the event of economic data once again disappointing consensus expectations. On the other hand, the supply factor is likely to provide these commodities with further support for the time being. Unless real interest rates rise at the same time, gold should outperform the more cyclical commodities in this scenario, at least in relative terms. Nevertheless, the question for gold is whether the US dollar’s strength is likely to prove an obstacle to stronger performance. The commodity markets – which have historically exhibited a greater bandwidth of fluctuation than equities – seem to be becoming more unpredictable. Indeed, this has been evident in recent weeks. Given the complexity of their current risk/return profile, it may therefore make sense to adopt a neutral stance towards commodities.


Too good to be true? It seems hardly conceivable that all the factors that have been so positive for equity markets in recent months can remain so stable and “benevolent”. As equity market returns have been well above their historic averages so far this year, it now appears only logical to take some profits.

Gérard Piasko

Gérard Piasko

Gérard Piasko is Chief Investment Officer and head of the investment committee of private bank Maerki Baumann & Co. AG. Before he was for many years Chief Investment Officer of Julius Baer, Sal. Oppenheim and Deutsche Bank.

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This publication is intended for information and marketing purposes only, and is not geared to the conclusion of a contract. It only contains the market and investment commentaries of Maerki Baumann & Co. AG and an assessment of selected financial instruments. Consequently, this publication does not constitute investment advice or a specific individual investment recommendation, and is not an offer for the purchase or sale of investment instruments. Maerki Baumann & Co. AG does not provide legal or tax advice. In addition, Maerki Baumann & Co. AG accepts no liability whatsoever for the content of this document; in particular, it does not accept any liability for losses of any kind, whether direct, indirect or incidental, which may be incurred as a result of using the information contained in this document and/or arising from the risks inherent in the financial markets.

Editorial deadline: 25 August 2021

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