Overview
- The US labour market is where the rubber meets the road and it has once again passed the test. We were concerned that the US was slowing towards a recession before the release of September non-farm payrolls. But once again the labour market showed its resilience and an ability to rebalance that continues to take the pressure off inflation.
- September payrolls were also the trigger to resolve contradictory pricing in equities and bonds. Before the payrolls report equities were firmly pricing a US soft landing, while fixed-income markets priced in a much harder landing or recession. Now that is resolved and both markets agree on a soft landing the outlook for returns for both major asset classes is modest.
- Buy quality credit and duration. We continue to have a large overweight in sovereign bonds and long-duration assets such as property and infrastructure and we move slightly overweight investment-grade credit.
- Reduce underweight equities by lifting Japan, the US, and EM. We maintain a small underweight heading into year-end cognisant of the risks attached to geopolitical events in the Middle East and the US presidential election. Chinese equities will likely rally further on the announcement of more stimulus. Other positives are that 1) valuations are not stretched, 2) historically the rally is not large to date, and 3) the US dollar is likely to weaken.
- Buy the Aussie dollar. The US soft landing will likely set up the global economy for a rebound in growth next year and we continue to buy Australian dollars, with a target of around $US0.75 by mid-2025.
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