Markets at Highs: What Will Come First, a Correction or a Rotation?

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In the equity market, historical highs can evoke mixed feelings. According to investment firms, historically, bull markets have lasted much longer than bear markets, reaching new highs in each cycle and creating opportunities.

For example, following the earnings presentation of U.S. banks, the good results reflect the positive state of the sector in the last quarter before expected rate cuts in September by the Fed and ECB. However, the equity markets saw sales gain momentum due to bans on exporting advanced technology to China for AI development. “Thus, stocks like Nvidia and ASML suffered losses close to double digits, dragging down major indices: the S&P 500 lost 2% over the last 5 days compared to -4% for the Nasdaq and -4.3% for the Euro Stoxx 50, while the Ibex 35 fell only 1.45% due to its lower tech weight,” notes Portocolom’s investment team.

Edmond de Rothschild AM’s latest analysis indicates that recent U.S. political events have reinforced the large rotation underway since inflation data was released a few weeks ago. “Investors are replacing large-cap companies with small caps, tech stocks with energy and real estate, and growth with value,” they note.

“With the momentum of energy stocks, the U.S. market continues to reach new highs, diverging from the sideways movement of the European stock market, which has not reached new highs since April. Issues in China are affecting Europe’s main sector, leaving it behind in stock market gains,” explain Activotrade.

When the market hits a new high, investors might conclude that the market has peaked and they’ve missed the opportunity. According to Capital Group, nothing could be further from the truth. “Over long periods, markets have tended to rise and reach multiple highs in a cycle,” they note.

Everyone knows that market declines are inevitable and can happen at any time. But according to Capital Group, history has shown that periods when markets hit new highs have offered an attractive entry point for long-term investors. “Since 1950, whenever the S&P 500 index has reached its first all-time high in at least a year, the average equity return has been 17.1% in the following twelve months. Except at the start of the 2007 financial crisis, an investor would have gained in all these periods,” explain Capital Group.

“That’s why we focus on themes like globalization, productivity, and innovation, which drive growth significantly. We will face market declines, but these have not changed the long-term trajectory. Hence, I usually advocate for market appreciation,” adds Martin Jacobs, equity manager at Capital Group.

According to Yves Bonzon, CIO of Swiss private bank Julius Baer, the market’s performance has been good so far this year, and it seems the bears have capitulated for the sake of their careers. “Consequently, it wouldn’t take much to reset the greed (bullish sentiment) and fear (bearish sentiment) indicator back towards fear. The risk/reward ratio for the second half of the year is the least attractive we’ve seen in a long time. To be clear, we still believe the main trend is bullish. Therefore, we are trying to protect against an intermediate correction in a bullish trend,” states Bonzon.

For Julius Baer’s CIO, the narrative is now shifting towards a healthy rotation but not immediately. “Although still to be seen, we are not convinced of the likelihood of a swift and convenient shift towards a much broader U.S. equity bull market where the equally weighted S&P 500 suddenly outperforms its market-cap weighted counterpart. In other words, the economy may enjoy Goldilocks-like conditions, but markets are rarely so kind. We doubt the Goldilocks scenario for equities, with a broad market rise, began last Thursday,” he argues.

Another sign that a sustainable rotation has not yet begun is the disappointing performance of European and Chinese equities. “If such a rotation is underway, European and Chinese equities do not seem to be benefiting from it. We believe the odds of a correction are higher than those of a sustainable rotation. We cannot overlook the disturbances that likely would have flooded the U.S. if the assassination attempt on former President Trump had succeeded,” he asserts.

Second Half Outlook

According to DPAM, we are in an atypical cycle characterized by persistent economic growth amid restrictive monetary policy, causing concern for both bulls and bears. “The balance between disinflation, growth, interest rate hikes, and long-term secular themes continues. Bulls currently have the upper hand, as evidenced by the new market highs,” notes Johan Van Geeteruyen, CIO of Fundamental Equity at DPAM.

In this context, Van Geeteruyen believes that investors have yet to react and prefer large caps until economic stability improves, with monetary tightening also affecting small caps. “We believe the best strategy is to accumulate positions gradually, as several catalysts, such as ECB rate cuts, improved macroeconomic conditions, and low positioning, suggest an imminent shift. The recent improvement in flows, with the return of U.S. investors, could also be a strong catalyst,” he notes.

According to their forecasts, the market expects growth recovery in 2024 and 2025. They believe the composite PMI has risen above 50, thanks to the strength of the services PMI, and the manufacturing PMI has improved from 45 at the beginning of the year to over 47. This turning point historically indicates an imminent superior performance of small caps, which are sensitive to economic improvements but have been at recessionary valuation levels for over two years.

“We remain neutral on the U.S. due to valuation issues but lean towards overweighting Europe. We avoid underweighting the U.S. due to its dynamism and safe-haven status. Factors supporting our overweight position in Europe include improving macroeconomic indicators, increased business confidence, a resurgence in business activity, attractive capital distribution, and undervalued AI dissemination,” points out Van Geeteruyen.

Schroders Capital Launches Pilot Project for Tokenization to Invest in ILS

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Schroders Capital has announced the launch of an innovative pilot project designed to enhance the investment and management of insurance-linked securities (ILS). This pilot has been a collaboration with the global reinsurance company Hannover Re.

The project is part of Schroders’ commitment to innovation and leadership in digital assets, following their participation in the Monetary Authority of Singapore’s “Project Guardian” last year and the issuance of the first digital bond in sterling by the European Investment Bank.

The initiative with Hannover Re, tested internally by Schroders, has successfully tokenized reinsurance contracts and traded them on a public blockchain platform using smart contracts. Each token represents a stake in a portfolio of reinsurance contracts, demonstrating how ILS funds could invest through a digital ecosystem in the future.

According to the investment firm, tokenizing these contracts has allowed, with constant oversight from investment professionals, the automation of many time-consuming processes. For instance, the investment process has been streamlined by automating subscriptions and reducing settlement times.

Additionally, by integrating key data sources for catastrophe insurance into smart contracts, payments to the appropriate recipient are automatically triggered if specific natural disasters, such as hurricanes or earthquakes in the U.S. or windstorms in Europe, occur.

The pilot project has also shown the potential to improve the customer experience by increasing accessibility, allowing tokens to be held in investors’ digital wallets alongside their other digital investments. The use of a public blockchain has also enhanced transparency while maintaining proper governance and controls.

Earlier this year, Schroders Capital announced that its ILS team now manages over $5 billion in funds as client demand continues to grow. The ILS team is part of Schroders Capital’s Private Debt and Credit Alternatives (PCDA) business, which was launched last year and manages over $30 billion in assets.

“The success of this pilot project highlights the immense potential to increase transparency, streamline investment processes, and enhance the customer experience in the reinsurance sector. It paves the way for a more interconnected and efficient digital ecosystem, and we look forward to exploring the broader application of this technology to more investment scenarios and clients,” said Stephan Ruoff, Co-Head of Private Debt and Credit Alternatives at Schroders Capital.

Henning Ludolphs, Managing Director of Retrocession and Capital Markets at Hannover Re, added, “This pilot project has been a great opportunity to understand the capabilities of blockchain technology when applied to the reinsurance market. With solid governance and integrated compliance, the pilot also demonstrated that the regulatory and operational risks surrounding blockchain are similar to those of other market transactions. While it is an emerging technology, we foresee greater appetite for such investments in the future, and this pilot prepares us well to evolve our approach and generate more retrocession capacity through a different source.”

Innovation is a key aspect of Schroders Capital’s strategy, and the findings from this project will be used to explore further tokenization opportunities in the reinsurance market. Additionally, the company recently unveiled the launch of the Generative AI Investment Analyst platform, designed to accelerate the analysis of large volumes of data.

Biden Gives Up for Reelection but Policy Proposals Will Remain Key, Experts Say

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The day starts digesting the big news of the weekend, Joe Biden’s withdrawal as a candidate for the U.S. presidential election in November, with the dollar slightly falling and Treasury bonds rising, while European stocks recover from their worst week of the year. From a political perspective, experts point out that the upcoming Democratic Party convention in August will be decisive in determining who will replace Biden. From a market and economic policy perspective, they suggest that few changes are expected.

In the opinion of Matt Britzman, Senior Equity Analyst at Hargreaves Lansdown, operators around the world will try to figure out what Biden’s withdrawal from the U.S. election campaign means for the markets. “U.S. stock futures will open higher, but with just three months to go before the election, this is uncharted territory, and markets usually don’t like uncertainty. Besides the general nervousness, investors might expect the sectors that have received a boost from the so-called Trump trade to pull back a bit now that he faces an unknown opponent. This includes sectors like energy, banks, and bitcoin, as they are expected to receive support from a Trump administration. A prudent pullback wouldn’t be a surprise, but Trump remains a clear favorite, so don’t expect significant changes for now,” says Britzman.

Currency markets, for example, have ignored the political events in the U.S., and the news of Joe Biden’s withdrawal from the presidential race and his support for Vice President Kamala Harris is having little impact on the market in the early hours of the Asian session. According to Eurizon, currency markets are usually calm in the summer months, and this week there will be few important data releases or political meetings to stir them. Attention will be on the dynamics of intervention and stop loss in the Japanese yen, as well as any details that may arise regarding monetary policy in a hypothetical second Trump term. In terms of data, Wednesday will bring the July PMI business activity index, an updated reading of the main economic trends (especially the apparent slowdown of the U.S. economy). U.S. GDP growth in the second quarter (Thursday) and PCE inflation (Friday) will complete the week.

Candidate Question

Gilles Moëc, Chief Economist at AXA IM, argues that it doesn’t matter who the candidate is because the problems are the same. “Beyond the name of Biden’s replacement, the key issue for us is how different the rival’s economic platform will be from Biden’s. With limited time to produce a new agenda and, in any case, a decent level of consensus throughout the Democratic Party on economic issues, we wouldn’t expect many changes. We note that Kamala Harris herself and most of the natural alternatives are closely associated with the Biden administration or the mainstream Democrats,” he explains.

In the opinion of Paul Donovan, Chief Economist at UBS GWM, “politicians matter less for economies than they think.” Instead, he believes markets react if the probabilities of policies change. “What matters is who the Democrats choose as their candidate; if that choice significantly changes policy proposals; if the probabilities for the presidential and congressional elections change. It will take time to get information on any of these points,” says Donovan.

For Marisa Calderon, President and CEO of Prosperity Now, so far, Biden’s economic policies have not been bad. “President Biden came into office at a time of deep economic insecurity for many Americans. The pandemic had caused incalculable damage to the nation’s labor market and created the threat of greater systemic inequality and a potentially larger wealth gap between different communities. However, his track record to date tells a different story. With the highest job growth ever seen in the United States, his policies have helped the country get back to work. We are inspired by his track record of successes in the White House, and we look forward to continuing to work with his administration for the rest of his term to drive sound and equitable economic policy that works for all Americans,” says Calderon.

Political Proposals

In this regard, what policies are relevant? In Moëc’s opinion, regarding international trade, any Democratic candidate would likely pursue a fairly strong “anti-China” policy anyway. “Biden did not repeal the special tariffs imposed by Trump, and with public opinion harboring negative feelings about China—the Pew Center polls suggest that more than 80% of U.S. citizens have a negative view of the country—rolling back the Chinese export machine has become uncontroversial in Washington,” he says.

According to him, “the key difference with Trump would still be the treatment of imports from other suppliers, which in the event of a Democratic victory in November would spare European exporters from a smaller but still painful version of the trade war against Beijing.”

He also argues that any Democratic candidate would likely maintain Biden’s focus on industrial policy, with a continuation of the CHIPS Act and the IRA, with sustained support for the U.S. transition to net zero. “In fiscal matters, much of the savings any Democratic candidate would consider would come from allowing some of the tax cuts implemented by Trump in 2017 to expire, at least those that benefit the highest-paid individuals,” he adds.

Another relevant policy is immigration. According to Moëc, “any Democratic candidate would probably commit to reducing entry flows, but in any case, the impact on the working-age population dynamics would be less than if Trump’s hardline agenda prevails.”

The Chief Economist of AXA IM believes the situation remains fluid, but his thesis is that even with Joe Biden out of the race, it is Donald Trump who would still present the agenda with the most tangible impact on the markets, given its inflationary aspects (brutal repression of immigration, widespread increases in customs tariffs, accommodative fiscal policy). “In any case, the likelihood of any Democratic president also enjoying a majority in Congress is small, which would reduce their ability to direct the economy. The ‘Trump Trade,’ which has recently supported the dollar and put a floor under long-term interest rates despite rate cut expectations, is likely to remain active,” he concludes.

On the other hand, analysts at Edmond de Rothschild AM highlight that markets were buoyed by the Trump-Vance campaign’s promises to provide budgetary and regulatory aid to the U.S. economy. “However, the current economic conditions are very different from those that existed when Donald Trump came to the presidency in 2016. Interest rates and the public deficit are now much higher, so the winning candidate will have less room to maneuver. The economy rebounded in 2017 after slowing down in 2015-16, but the next president will face a slowdown,” they explain.

Focusing on the implications of a second Trump presidency, Elliot Hentov, Head of Macro Policy Research at SSGA, highlights that it would be logical to expect a considerable fiscal expansion in the event of a Republican sweep, with a more modest fiscal boost in the case of a divided Congress. In his opinion, there are three relevant focuses: energy, trade, and security.

“In trade, almost certainly there would be tariff increases, with a disproportionate share being imposed on Chinese imports, but other countries would also be affected. In energy, Trump is likely to amplify U.S. efforts to increase energy exports, which could increase global supply and help contain prices, benefiting net energy importers. And in foreign/security policy, a Trump presidency would likely continue extracting greater security commitments from U.S. allies, notably in Europe,” adds Hentov.

The ECB Opts for a “Meeting-by-Meeting” Approach with a Focus on Data

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Yesterday’s European Central Bank (ECB) meeting concluded without major surprises, resulting in limited movements in the financial markets. According to analyses by top international asset managers, the key takeaway from the meeting and subsequent remarks by Christine Lagarde, President of the ECB, was the emphasis on data-driven decisions.

Recent figures on service inflation and wages have not moderated as initially expected after the June rate cut. “The data flow in the coming months will determine the pace at which the ECB removes additional restrictions,” says Konstantin Veit, Portfolio Manager at PIMCO. The new projections, to be published in September, should confirm that inflation is systematically converging toward the target in the second half of 2025. Growth in the second quarter is expected to be lower than in the first, with restrictive monetary policy continuing to create challenging financing conditions, especially for companies. Before the September meeting, many data points will be released, providing sufficient confidence to resume cuts.

According to Felix Feather, Economist at abrdn, “This move reflects the ECB’s reluctance to extend its current cycle of cuts until new encouraging data is available. The central bank continued to emphasize its reliance on data, indicating that it is not committed to a specific rate path in advance.”

Salman Ahmed, Global Head of Macro and Strategic Asset Allocation at Fidelity International, notes that the ECB also downplayed the recent uptick in inflation, which it deemed temporary, and general wage pressures, which broadly align with its expectations. “Meanwhile, downside risks to growth, mainly due to the slow recovery of the industrial sector and weak credit dynamics affecting corporate investment demand, justify the ECB removing some degree of restriction. We will have two more months of data on inflation and employment, which should pave the way for cuts, barring any upward surprises,” Ahmed explains.

Inflation Analysis

Sandra Rhouma, Economist in the European Fixed Income team at AllianceBernstein, observes that the ECB’s reaction function remains unchanged, conditioned by core inflation dynamics, inflation outlook, and the strength of monetary policy transmission. “The statement highlights that most inflation indicators remained stable or decreased in June, although service inflation remains high at 4.1% in June. However, other core inflation indicators, excluding more volatile components, are at or below 2%,” she explains.

Rhouma expects core disinflation to continue and wage growth to relax in the second half of the year. “Regarding wages specifically, the ECB appears confident that profits have started to absorb the high wage growth, weakening the transmission to core prices,” she notes.

Dave Chappel, Senior Fixed Income Manager at Columbia Threadneedle Investments, points out that while growth risks remain to the downside, labor compensation is still recovering in some sectors due to post-COVID inflation increases. “The ECB remains confident that wages will ease in the coming quarters and return to levels that will allow inflation to sustainably reach the 2% target. As this happens, the central bank will take further normalization steps, likely starting in September,” he adds.

Forecast for Upcoming Cuts

Veit’s forecast is that the ECB will continue lowering official interest rates during expert projection meetings, with the next deposit facility rate cut expected in September. “Unlike earlier this year, current market prices seem reasonable and broadly align with our baseline of three cuts this year,” Veit adds.

Rhouma anticipates two additional cuts this year, in September and December, aligning with market expectations. “This pace of cuts seems most appropriate given the data dynamics and inflation outlook. Although reluctant to provide firm guidance, it is the pace some members, even among the hawks, have started to support. Structurally, nothing has changed in the Eurozone economy to justify neutral interest rates of 2.3% in 2-3 years, as currently valued by the market,” she clarifies.

Amundi expects a 25 basis points rate cut at the next meeting in September. “Although wage growth remains high and steady, President Lagarde seems to view it as a lagging indicator of inflationary pressure, and both she and the Council appear more concerned about slowing economic growth,” argues Guy Stear, Head of Developed Markets Strategy at Amundi.

Finally, Peter Goves, Head of Developed Markets Sovereign Debt Analysis at MFS IM, supports the baseline hypothesis of a cut in September.

“A cut is around 80% priced in for September. We believe the upcoming data should confirm the disinflationary narrative and allow for a cut at the next meeting. Along with the increasing likelihood of the Federal Reserve cutting rates (global factors dragging yields down), we see Bund yields falling in the second half, with a year-end target of 2.25%. This keeps us constructive on eurozone duration,” he argues.

A Microsoft Glitch Causes Problems on the London Stock Exchange and in Banks Worldwide

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SEC fines Liquidnet

The “Blue Screen of Death,” a term used to describe a major Microsoft malfunction, has caused widespread operational issues affecting the London Stock Exchange (LSE), banks, airlines, and airports during peak tourist season.

The problems began at 5:30 GMT with an alert from CrowdStrike to its clients, warning that the company’s “Falcon Sensor” software was causing Microsoft Windows to crash and display the infamous “Blue Screen of Death.” The alert included a manual fix for the issue, according to Reuters.

The LSE website has issued a warning stating that the RNS news service is experiencing a global third-party technical issue preventing news publication. “Technical teams are working to restore the service, with no impact on the trading of securities or other services on the London Stock Exchange.” Meanwhile, Bolsas y Mercados Españoles (BME), the operator of Spanish financial markets, and the regulator CNMV have confirmed that they are unaffected by the Microsoft issue, as reported by Economía Digital.

According to EFE, Downdetector, a website monitoring service outages, has noted sudden spikes in incidents affecting various banking websites using Microsoft applications since last night. Banks such as Santander España, Kutxabank, Unicaja, and Ibercaja are experiencing issues, according to capital.es.

Travel Industry Challenges

The travel sector is one of the hardest hit, with airports worldwide facing operational disruptions. Major US airlines, including Delta, United, and American Airlines, grounded all flights due to the Microsoft outage, as reported by EFE. The US Federal Aviation Administration (FAA) confirmed the incident, affecting all domestic flights regardless of their destination. Airports in Tokyo, Amsterdam, Berlin, and several in Spain have also reported system problems and delays.

The organizing committee of the Paris Olympics announced on Friday that its IT operations were impacted by a global cyber outage just a week before the event’s start. “We have activated contingency plans to continue our operations,” the committee stated, according to Reuters.

Stock Market Reactions

Companies facing technical issues saw their stock prices decline. In Spain, financial sector stocks fell between 1.19% for Santander and 0.3% for Unicaja. In Europe, Société Générale and BNP Paribas dropped by 1.3%, while Deutsche Bank in Germany fell by 2%.

Affected by the LSE disruption, Deutsche Boerse, the operator of the Frankfurt Stock Exchange, saw a 0.95% decline, and Euronext, which owns the Paris and Milan exchanges, among others, fell by 1.25%.

Tech stocks also had a rough day. CrowdStrike’s shares plummeted by 9% in early Wall Street trading, while Microsoft remained almost flat compared to the previous day’s closing price.

HSBC AM Advocates Real Diversification Amid Economic Fragmentation and Active Fiscal Policies

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In the opinion of Sefian Kasem, Global Head of ETF & Indexing Investment Specialists at HSBC AM, and paraphrasing William Shakespeare, the key to the outlook for the second half of the year lies in “cuts or no cuts (interest rates), that is the question.”

He explains, “Interest rate outlooks have changed significantly, especially concerning the U.S., and there is a greater consensus that they will be higher over the next 10 years; which creates a very different context from the last decade.” Additionally, he believes that the next six months should be approached with a clear change in mindset: “In 2023, we talked about a hard landing, but in 2024 we are already talking about a soft landing.”

This leads to his first reflection: we are facing a more fragmented environment in terms of monetary policy and geopolitics. For Kasem, although these two ideas—higher rates and greater fragmentation—will be present over the next ten years, they carry significant weight in the short term.

The HSBC AM head points out that the expectation has shifted from seven rate cuts to just two in the U.S. for this year. “Estimates of a more aggressive policy by banks continue. Their main driver will be inflation expectations, which is the primary element that monetary institutions are weighing to make monetary policy decisions,” he states.

According to his analysis, central banks in developed markets have been very focused on supporting the economic growth of their countries, but he believes it is better to use fiscal policy for that purpose. “Many of these countries will have to make decisions about their fiscal policy objectives and not rely as much on the measures we saw during the pandemic crisis to support the economies. Of course, they will have to do this in a context where inflation has moderated but is still high,” he adds.

Regarding the second fragmentation, geopolitics, Kasem warns that certain issues have gained relevance, such as infrastructure security and the resilience of supply chains. “Again, everything is connected. Greater attention will be paid to what is done with the economy and how fiscal policies are used because we are moving toward a more fragmented geopolitical environment,” he reiterates.

Implications for the Portfolio

For the HSBC AM specialist, this latter idea is relevant when positioning portfolios. “This demonstrates that investors need to have real diversification in their portfolios, as well as thematic bets, maintaining a multi-asset approach. It could be said that the time has come for a new diversification because generating alpha will be complex,” he argues.

His first proposal for investors is to be more tactical and selective in fixed income positions. He particularly finds the yields provided by global high yield, US ABS, and the 60/40 portfolio very attractive. On the latter, he notes: “The 60/40 portfolios had a tough time in 2022, but they still work. It just needs to be reviewed because, with the changing context, we cannot expect it to perform the same way it did over the last ten years.”

Additionally, he shows a preference for reducing exposure to U.S. equities, as he believes that in the risk/reward relationship, there are fixed income assets that perform similarly and offer fewer risks.

He also maintains a positive view of emerging markets. He explains that they are now much more robust than they used to be thanks to the dynamics of their monetary policy. “We prefer to introduce emerging market risk into the portfolio because their valuations are more attractive. In particular, we prefer emerging countries that are less related to the U.S.,” Kasem adds.

Finally, the HSBC AM specialist focuses on alternative assets, particularly real assets. He warns that at first glance, they may seem less attractive than before, but they can play an interesting diversifying role in terms of asset type and source of return. “It is important to have flexibility to capitalize on opportunities in the private equity segment and also in private credit, always with a medium-to-long-term view. Having exposure to commodities, real estate, and infrastructure, both listed and unlisted, will generate very good diversification for the current fragmentation scenario,” Kasem concludes.

The EU’s ESG Regulatory Framework Is Positive, but It Needs Greater Clarity and Improvements

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According to a survey conducted by CFA Institute on sustainable finance among investors, the EU’s ESG regulatory framework contributes to an increase in Sustainable Investment but needs greater clarity and improvements. One of the main conclusions of this study is the variety of challenges faced by investors in the EU regarding the disclosure of sustainable finance, the reliability of data, and the complexity of ESG ratings.

“This study represents the views of financial professionals across the ecosystem, from large asset owners to boutique asset managers. One of the reasons we conducted this study is to understand how our members perceive the current EU regulatory regime, which aims to support and promote sustainable investment. We observe mixed opinions on the topic: while there is broad consensus that the EU’s sustainable finance regime is advancing the international agenda, a similar proportion feels that the EU’s efforts are confusing, and the lack of reliable ESG data does not justify the integration of ESG considerations into investment decisions. This is a concerning finding, and regulators need to pay attention to the sentiments of investment professionals,” highlights Josina Kamerling, Head of Regulatory Affairs EMEA at CFA Institute.

In this regard, investors are urging regulators to continue driving the international sustainability agenda but with legislation better adapted to ESG disclosure requirements to ensure alignment with their needs. Regarding the lack of reliable and verifiable data, the report concludes that the rapid implementation timeline of the applicable EU legislation has forced companies and asset managers to provide required disclosures despite the lack of reliable and verifiable data.

A testament to this is that 65% stated that the lack of reliable ESG data was one of the biggest challenges for asset managers in implementing the EU’s SFDR, while 45% consider that the high costs of obtaining ESG data and the lack of skilled personnel with experience to collect and analyze it were other major challenges in implementing the SFDR.

ESG Information

The report reveals that retail investors can be confused by the volume and complexities of sustainability information, making it difficult for them to use it to make appropriate investment decisions. 45% of respondents indicated that the amount and complexity of ESG information often lead to confusion among retail investors when making an investment decision. Specifically, 36% said that the disclosure requirements under Articles 8 and 9 of the SFDR are too complex and make it difficult for retail investors to fully understand the sustainability impact of the funds they are considering investing in.

“The lack of clear definitions in the SFDR has resulted in asset managers and companies interpreting existing rules and standards in various ways, leading to diverse implementation of the EU’s ESG legislation,” the report concludes, noting that 32% expressed that it was difficult to compare ESG products because the required disclosures are not standardized and are not comparable across jurisdictions for retail investors. Furthermore, 37% believe that the regulation of the EU Taxonomy has reached an excessive level of development, resulting in information complexity and confusion among investors and stakeholders.

Recommendations for Regulators

Following the survey’s conclusions, CFA Institute has developed several recommendations for EU regulators to “address the concerns expressed by investors.” These recommendations include:

  1.  Continuing to drive the international sustainability agenda. Focus on developing more step-by-step adapted legislation regarding ESG disclosure requirements and taxonomies to ensure alignment with the needs of financial market participants.
  2. Providing clear and consistent ESG terminology throughout the sustainable finance legislative framework. Clearer definitions would promote consistency in the implementation of ESG-related legislation and minimize diverse interpretations of rules and standards.
  3.  Considering the challenge posed by unreliable ESG data and the associated costs of collecting ESG data and training personnel for further analysis. Such issues currently limit compliance with the disclosure requirements in the EU’s sustainable finance legislative framework.
  4. Better clarifying the fund categorization system described in the SFDR for the disclosure requirements under Articles 8 and 9 of the regulation. A clearer approach could reduce the complexity of ESG disclosures for investors and mitigate greenwashing risks.
  5.  Addressing the complexity of ESG ratings and the divergent methodologies used by providers. The introduction of disclosure requirements, as envisaged in the proposed regulation on ESG rating activities, is likely to increase confidence in ESG rating providers and improve the comparability of their assessments.

Investors Remain Bullish Driven by the Expected Fed Rate Cuts

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Optimism remains among investors, according to the global manager survey conducted monthly by Bank of America. According to the entity, they remain bullish driven by the expected Fed rate cuts and strong expectations that a soft landing will eventually be achieved in the U.S. economy.

However, it is noteworthy that growth expectations in July are lower and that FMS cash levels have risen to 4.1%. “Monetary policy is too restrictive according to 39% of investors, the most restrictive since November 2008, but this, in turn, reinforces the belief that global interest rates will drop in the next 12 months,” noted BofA.

56% of managers expect the Fed to cut rates for the first time at the FOMC meeting on September 18, while 87% estimate that the first Fed cut will occur in the second half of 2024. “84% expect at least two Fed rate cuts in the next 12 months: 22% predict two cuts, 40% predict three cuts, and 22% predict more than three cuts,” the survey specifies.

A soft landing is the most plausible option for 68% of respondents compared to 11% who expect a hard landing and 18% who expect neither. The bank’s conclusion is key: “We believe that hard landing risks are undervalued, given the slowdown in U.S. consumption, the labor market, and public spending. This makes us more bullish on bonds and gold in the second half of 2024.” They add that the shift in conviction from “long stocks and short bonds” expects an impact on the soft landing narrative and policy consolidating the existing conviction.

Investors’ global growth expectations decreased to a net 27% as they anticipate a weaker economy. In this regard, the entity explains that the increased pessimism about global growth this month is partly due to more negative U.S. growth prospects.

In fact, 53% of investors expect the U.S. economy to weaken, the highest percentage since December 2013. For now, two out of three investors still do not expect a global recession in the next 12 months. Specifically, 67% say a recession is unlikely, slightly down from 73% in June.

Complementing this view, “higher inflation” is no longer the main risk identified by managers, replaced by geopolitics. “87% expect lower rates, 81% a steeper yield curve, and 62% predict at least three Fed cuts in the next 12 months, starting on September 18,” noted BofA.

Asset Allocation

In this context, investors generally increased their allocation to utilities, U.S., emerging markets, and the UK, and reduced their exposure to the eurozone, commodities, and discretionary spending. Specifically, in July, investors remain overweight in equities and underweight in bonds. Notably, eurozone equity allocation fell to 10%, with a 20 percentage point month-over-month decline; the largest monthly drop since July 2012. Conversely, equity investors are more overweight in healthcare, technology, and telecommunications.

“71% of investors believe that being long in the Seven Magnificent is the most crowded trade. July marks the 16th consecutive month in which it has been the most crowded trade. 45% of respondents do not believe AI is a bubble, but a growing 43% of investors do,” added BofA.

Pictet Alternative Advisors Acquires Technology Services Group

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The team led by Edmund Buckley, Head of Direct Private Equity Investments at Pictet AA, the alternative investments division of the Swiss Pictet Group, has acquired Technology Services Group (TSG), a provider of IT services for rapidly growing small and medium-sized enterprises based in the UK. “We invest in high-quality businesses led by top entrepreneurs and are delighted to partner with Rory McKeand and the TSG management team to achieve their growth objectives,” Buckley explained.

This is the second investment by Pictet AA’s direct private equity team, following the acquisition of a majority stake in Pareto FM, a leading provider of technical services for facilities management with ESG criteria in the construction sector, in November 2023. According to the management firm, TSG covers the full range of technology within the Microsoft ecosystem, facilitating companies’ transition to cloud-based infrastructure. It holds seven Microsoft designations: Business Applications, Modern Work, Security, Digital & App Innovation, Infrastructure, Data & Artificial Intelligence, and Cloud, making it one of the few UK Microsoft Solutions Partners accredited with technical and execution capability across all Microsoft, Azure & Cloud solutions, business applications, and cybersecurity. Based in Newcastle, with over 250 full-time employees and offices in London and Glasgow, TSG serves 1,300 clients across various industries in a market driven by strong outsourcing and digitalization trends.

Andrzej Sokolowski, Head of Private Equity in the UK at Pictet AA, noted that TSG has an attractive and defensible business model, with a high proportion of recurring revenue and clients who value service quality and expertise across the entire Microsoft suite. “It offers solutions in Azure, Dynamics, and cybersecurity, as well as accelerated deployment of artificial intelligence tools. We see significant growth potential in TSG, both organically and through mergers and acquisitions.”

Rory McKeand, CEO of TSG, stated: “The demand for cloud services among SMEs is starting from a low base and is boosted by the new and powerful generation of Microsoft productivity tools. Pictet’s investment and collaboration will accelerate the next stage of our growth.”

Pictet AA acquired TSG from founding owners Sir Graham Wylie and David Stonehouse, as well as the management team, which has reinvested part of the proceeds. “We are proud of the growth and success that TSG has achieved as a leading provider of exceptional quality IT services focused on Microsoft and the Cloud. We wish Rory, his team, the staff, and Pictet all the best for the future,” Stonehouse remarked.

The ECB’s July Meeting Arrives With No Forecast of Changes in Rates, Discourse, or Stance

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The European Central Bank (ECB) will hold its July monetary policy meeting tomorrow. According to asset managers, it is likely to proceed without major surprises and, most notably, without new interest rate cuts as market expectations suggest.

“The ECB’s July monetary policy meeting is likely to pass without incident. Similar to market expectations, we do not anticipate any interest rate cuts. Data dependency remains high, decisions are made meeting by meeting, and there is no prior commitment to a possible rate cut in September,” acknowledges Ulrike Kastens, economist for Europe at DWS.

This probable pause in July, according to Kevin Thozet, member of the investment committee at Carmignac, “will allow the institution to better assess the region’s inflation and growth trajectory and confirm that the path forward is as desired. However, the prospects of a new rate cut in September, along with the Fed, are high.”

Currently, data indicate that eurozone inflation fell to 2.5% year-on-year, while core inflation remained unchanged at 2.9%. In the opinion of Jean-Paul van Oudheusden, market analyst at eToro, as long as interest rates stay above 3%, it is likely that the ECB’s monetary policy will remain restrictive. “The current base interest rate is 4.25%, which provides room for further rate cuts despite the latest adjustment to interest rate expectations made by the central bank in June. Recently, the central bank has been cryptic about its interest rate path, but its goal is not to surprise the markets. Christine Lagarde could prepare the market for a rate cut in September or October in her press conference on Thursday,” comments van Oudheusden.

Regarding what to expect from tomorrow’s meeting, Germán García Mellado, fixed income manager at A&G, adds: “Regarding the reduction in bond purchase programs, no significant new developments are expected, since in July, reinvestments of the special program launched during the pandemic (PEPP) began to be reduced by 7.5 billion per month, with the aim of fully reducing reinvestments by 2025.”

Already stated by the ECB

In line with what the ECB has explained so far, given that there are no new growth and inflation projections, it is unlikely that the communication will change. According to Philipp E. Bärtschi, Chief Investment Officer of J. Safra Sarasin Sustainable AM, the ECB’s rate cut in June was accompanied by comments suggesting that the ECB will also cut its rates gradually rather than quickly. “However, due to the weaker growth momentum and the projected inflation path, we expect three more rate cuts in the eurozone this year,” notes E. Bärtschi.

“The messages issued in Sintra are consistent with previous communications, and barring surprises in the data, September is the preferred date for the next action by members. What is reaffirmed is the trend of rate cuts. This meeting will take place after the French elections, and although there is still some uncertainty around the composition of the next French government and the prospects for fiscal policy, we do not rule out seeing Lagarde addressing questions about what the ECB could do to protect French sovereign bonds and under what circumstances,” adds Guillermo Uriol, Investment Manager and Head of Investment Grade at Ibercaja Gestión.

Additionally, according to President Lagarde, the strength of the labor market allows the ECB to take time to gather new information. Consequently, in the opinion of Konstantin Veit, portfolio manager at PIMCO, the ECB is in no rush to cut rates further, decisions will continue to be made meeting by meeting, and the data flow in the coming months will determine the speed at which the ECB removes additional restrictions.

“Given the ECB’s reaction function, whose decisions are based on inflation outlooks, core inflation dynamics, and monetary policy transmission, we foresee that the ECB will continue cutting rates in expert projection meetings, and we expect the next rate cut to occur in September,” emphasizes Veit.

Forecast of new cuts

The market currently expects a 25 basis point rate cut in September and another in December/January. However, they identify that the ECB remains open to a slower rate cut process based on the data being published, with a meeting-by-meeting approach.

For their part, investment firms agree that the market is pricing in another 45 basis points of rate cuts for this year and consider that the current terminal rate, around 2.5%, above most estimates of a neutral interest rate for the eurozone, indicates a high concern about last-mile inflation. “Overall, the market valuation seems reasonable and broadly aligns with our baseline of three cuts for this year,” points out Veit.

On the possibility of rate cuts resuming in September, Peter Goves, Head of Developed Markets Sovereign Debt Analysis at MFS Investment Management, argues that it is not yet fully priced in, which leaves some room for an uptick in the event of a 25 basis point cut at that meeting. “This keeps us optimistic about eurozone duration in the short and medium term. European government bond spreads remain relatively tight given the risk of events in France (which turned out to be relatively brief and more idiosyncratic than systemic). We see this as a possible topic to address in the press conference, but we doubt Lagarde will comment on France’s domestic political situation. Additionally, Lagarde is likely to affirm that monetary policy transmission has worked well,” explains Goves.

The ECB’s challenge

For Thomas Hempell, Head of Macro Analysis at Generali AM, part of the Generali Investments ecosystem, the ECB sticks to its data-dependent approach and stressed that wage data plays a crucial role. “On the other hand, official interest rates remain well above the neutral rate. We believe that with the slow downward trend in inflation, the ECB will initiate quarterly interest rate cuts until the deposit rate reaches 2.5%. This broadly aligns with market expectations,” comments Hempell.

In the opinion of Gilles Moëc, Chief Economist at AXA IM, it is paradoxical that central banks are being harshly criticized just as they are about to declare victory over inflation at a manageable cost to the real economy. In fact, he considers that the ECB started cutting rates in June, before clear signs of recession began to accumulate. “We believe it will be tight, but there is a possibility that the ECB will remove monetary restraint quickly enough to avoid a recession phase. We do not expect an emergency cut at this week’s meeting; we believe there would have been clear signals to this effect at the annual conference in Sintra,” he states.

According to his forecasts, the ECB Governing Council meeting should be the occasion to make it clearer that the June cut was only the beginning of a process. “We expect the next 25 basis point cut to occur in September. The market is now pricing an 87% probability of a cut then, and we would put it even higher. It is true that disinflation has stalled, but surveys converge to paint a sufficiently moderate picture of underlying price pressure for the ECB not to wait too long. In June, Christine Lagarde energetically avoided engaging in a discussion about what would be a path to removing restrictions. We expect greater openness this week, largely validating current market prices,” he concludes.