The European Central Bank and Bank of England joined the easing party this summer but the US Federal Reserve heard the music and made a grand entrance this week, earnings its place at the centre of the dance floor with a 50 basis point cut. South Africa’s Reserve Bank also made the guest list, with its first cut in years.
The Bank of England, meanwhile, was reduced to wallflower status, watching the action unfold elsewhere.
Norges Bank also stood still – as did the Bank of Japan (BoJ), staying its hand after last month’s hike unleashed a wave of volatility on financial markets as the carry trade unwound.
The BoJ isn’t the only central bank out of lockstep with the Fed, said Patryk Drozdzik, an emerging markets macro strategist at the Amundi Investment Institute. On Wednesday, the Central Bank of Brazil opted for a “very much out of sync, unanimous 25bps Selic hike”.
The divergent timing and size of cuts between central banks is playing out in the currency markets, where the pound continued to strengthen versus the US dollar this week. Neil Wilson, chief market analyst at Finalto, said: “Sterling has gone to $1.33, its best in a long time.”
As to what this means for investors in UK equities, the jury is still out.
A stronger pound will be a headwind to large-cap exporters, although that could be offset by cheaper input costs from abroad, said Hussain Mehdi, investment strategy director at HSBC Asset Management.
“We believe UK stocks could continue to be a relative winner. In our view, the market remains unloved, cheap and defensive given its significant weights in consumer staples and healthcare that might better withstand a deterioration in global economic conditions,” he said.
“With UK corporate earnings growth expected to jump into double-digits for 2025, the overall profits picture also looks good.”
BlackRock is also overweight UK equities on a tactical six-to-12-month horizon, said Vivek Paul, UK chief investment strategist at the BlackRock Investment Institute.
Despite this week’s news, BlackRock expects the Bank of England to ultimately enact more rate cuts than the Fed over the coming years because the UK’s growth outlook is weaker. “That's why we hold a long-term, strategic preference for UK gilts versus other developed market government bonds,” he explained.
In a similar vein, Daniele Antonucci, chief investment officer at Quintet Private Bank, expects the BoE to cut again before this year is out, not least because sterling’s relative strength should keep a lid on inflation.
“With a stronger currency, imported inflation is likely to slow more quickly and, given less competitive exports, this might slow economic growth too. If that happens, consumer inflation might slow more rapidly than expected,” he explained.
For investors wondering how to position their portfolios as interest rates head downwards, Darius McDermott, managing director of Chelsea Financial Services and FundCalibre, suggested five asset classes that should perform well in an easing cycle and which together comprise a balanced portfolio: government bonds, dividend-paying stocks globally, small-caps, real estate investment trusts and infrastructure.
Now that the Fed has finally joined the party, conversation is turning to whether cuts will be sufficient to achieve a soft landing (in which case, equities should rally) or if the music stops and a recession unfolds (a scenario that would be better for bonds).
For those who aren’t sure what to expect, J. Safra Sarasin crunched the numbers and found that US Treasuries and defensive sectors of the equity market, such as healthcare and consumer staples, are likely to continue delivering steady returns regardless of the macro backdrop.
Personally, I find this quite reassuring given that the experts have been wrong about central bank moves and the health of the US economy before, and market timing is notoriously difficult.