Vontobel: 'From Europe to the US now the polls move the markets'

From Europe to the US in an election year, policy priorities will be dictated by the results of the polls, while financial markets await signs of solid changes in monetary policy from central banks. In Europe, the shift towards right-wing anti-establishment parties after last week's elections is set to change the political direction by prioritising national security and border control, less so the green transition.

After the defeat of the Green parties in parliament "the likelihood increases that public spending on green initiatives will probably be reduced during the legislature, while spending on defence and border control will increase", with implications for stocks related to these areas according to economists at the Swiss investment company Vontobel.

However, all is not lost: "If some of these projects towards the green transition are revised or postponed, it is unlikely that there will be a total reversal," explains Jean-Louis Nakamura, head of Vontobel's Conviction Equities boutique during the Market outlook presented by the asset management company. On the plate remain EUR 400 billion for European projects to be financed with non-reimbursable credit lines and loans to be used by 2030 and focused on energy efficiency, green energy, sustainable real estate renovations, and electric cars.

While signals on the next political moves by European parties are awaited, the financial markets are scrutinising the signals from the Federal Reserve, which is holding its board meeting today at the end of which no decisions on interest rates are expected. But it is only a matter of time: "The rate cut is coming, the Fed wants to be sure about the inflation trend towards the 2 per cent target," explains Mondher Bettaieb-Loriot, head of corporate bonds at Vontobel, who expects three rate cuts from the US central bank (the first in September), just a few months after the ECB cut: "The signs of the end of the restrictive monetary policy are clear. The Fed fears for the development of core inflation, whose main items from rents to insurance are showing a downward trend. If you look at real rates the room for manoeuvre is wide, about 250 basis points of reduction,' the manager adds.

The economic scenario remains reassuring on both sides of the Atlantic where recessionary risks seem to have been averted in both Europe and the United States, following the Covid crisis and the energy crisis as a consequence of the war in Ukraine. With inflation, which, net of sudden exogenous shocks, is firmly on the decline, investments in credit continue to perform positively, albeit with lower total returns than in 2023. "Bank and insurance financial bonds offer higher spreads, better than corporate bonds, in all categories from senior bonds to Tier2 to AT1s," explains Eoin Walsh, portfolio manager of TwentyFour Asset Management at Vontobel. AT1s (Additional Tier 1) also performed well, having returned to managers' portfolios after the Credit Suisse crisis, when they were wiped out to save the Swiss bank.