Market Views: Top risk assets primed for US rate cut gains
The US Federal Reserve has taken its first step towards monetary easing by cutting interest rates by 50 basis points (bps), lowering the federal funds rate target range to 4.75%-5%.
This marks the first rate cut in over four years and comes as a surprise to many market observers who had anticipated a more modest 25 basis point reduction.
Fed chair Jerome Powell said the decision reflects the proactive approach the central bank is taking to support economic growth and maintain stability in the face of easing inflation and growing concerns about the job market.
This move aligns with recent actions by other major central banks. The European Central Bank, Bank of England, and Bank of Canada have all implemented rate cuts in recent months, signaling a coordinated global effort to stimulate economic growth.
An easing monetary policy wilI boost the appeal of risk assets.
In light of these developments, AsianInvestor asked asset managers and industry experts which three risk assets they believe will see gains following the US rate cuts.
The following responses have been edited for brevity and clarity.
Michele Barlow, APAC head of investment strategy and research
State Street Global Advisors
We continue to expect a soft landing in the US.
On this basis, the environment for risk assets remains largely attractive.
However, we expect higher market volatility as the mixed economic data, election and geopolitical uncertainties still warrant some level of caution.
With the Fed now having pivoted, cutting rates by 50bps, we see opportunities in the following three asset classes:
First, gold is expected to continue to be supported by US rate cuts and ongoing market volatility.
Beyond providing low correlations to financial assets over multiple market cycles, gold has a strong track record of protecting against market volatility, protecting portfolios against systemic market shocks and tail events, and preserving purchasing power.
We also see selective opportunities in equities.
Within equities, we like quality large cap companies with resilient balance sheets and strong market positions, or with tailwinds to growth.
These companies should benefit from rate cuts while earnings tend to remain more resilient amid economic uncertainty.
Lastly, we see opportunities in emerging market hard currency debts, which should be supported by the drop in US yields and the potential for spread tightening in the absence of a recession.
Ray Sharma-Ong, head of multi-asset investment solutions, Southeast Asia
abrdn
The Fed positioned the 50 basis point rate cut as a recalibration of policy rates, rather than a sign of concern about the health of the labour market.
The dot plots showed the median Fed member expecting -100bps of total cuts this year and next, implying a more restrained path than would be from a dovish central bank.
The market is currently re-pricing for the Fed’s guidance of “recalibration”.
However, we see that risks are skewed towards more easing, and the Fed may move at a faster pace of rate normalisation than indicating by the median dot.
Should the labour market continue to soften, driven by the 2 job reports we have from now till November’s Federal Open Market Committee, markets may push for a -50bps cut from the Fed.
With this backdrop, we are constructive on duration, as rates have 2 drivers supporting its decline: Fed cuts, and softer data prompting accelerated further front loading of Fed cuts.
Where equities are concerned, we expect (i) long duration sectors (like global and Asian info tech and health care), as well as (ii) interest rate beneficiaries (like Korea, Taiwan, India and Asian REITs), to benefit from an easing rate environment.
In contrast, we expect shorter duration sectors like commodities and banks to lag. However, there is a need to be selective in the type of risk to position for.
US elections are less than two months away and with Harris at her widest lead versus Trump in odds. Any additional pricing in of her win will be a drag for broad market equities due to corporate tax proposals.
Sylvia Sheng, global multi-asset strategist
JP Morgan Asset Management
The Federal Reserve’s decision to cut the policy rate by 50 basis points (bps) and signal an ongoing cutting cycle marks an important shift in the economic landscape.
The fall in the cost of borrowing is expected to extend the business cycle, supporting a risk-on sentiment and a preference for overweights to credit and equity in our multi-asset portfolios.
Within global equities, we continue to favor US equities.
Despite high valuations, US equities remain attractive due to robust corporate balance sheets and strong cash flows.
The S&P 500 is expected to see solid earnings growth in 2025, with additional upside potential from the tech sector driven by AI adoption and strong free cash flow returns.
Additionally, we are constructive on Japanese equities. Despite recent volatility and a stronger yen, the earnings prospects for Japanese firms, coupled with improvements in corporate governance, suggest further upside potential.
On the credit side, we like US high yield (HY) bonds. Currently, the spreads of US HY spreads are tight, and we anticipate further tightening as the economic cycle extends and default rates remain low.
With all-in yields exceeding 7%, HY credit offers equity-like returns while occupying a higher position in the capital stack, making it an attractive investment in the current macroeconomic environment.
Oliver Blackbourn, portfolio Manager, multi-asset team
Janus Henderson Investors
Which assets perform positively following rate cuts depends on how the reductions are interpreted.
Cuts that are seen as stopping the weakening in the economy could lead to gains in many risk assets.
Small and mid-cap stocks look well placed for strong performance should the cycle continue amid falling borrowing costs, given their higher leverage and greater proportion of floating rate debt.
At the same time, valuations look much closer to average compared to history, in contrast to many other parts of global equity markets.
Listed real estate stocks could be in line for better performance given that bond yields tend to be an important factor in relative performance.
Property investments tend to be built on significant debt, and on-going refinancing concerns have weighed on the sector.
Lower borrowing costs in an environment of stabilising growth should provide a better outlook for re-financing.
High yield credit spreads could see further compression if interest rates are lowered within an environment of reasonable growth.
While it is mainly the lowest-rated part of the market that offers value, better refinancing conditions would be helpful and this would likely boost the market overall, although investors will still need to avoid the worst companies.
Colin Graham, head of the sustainable multi asset team
Robeco
The Fed's natural tendency is to remain behind investor curve expectations, and the fall in US bond yields has already delivered an easing in monetary policy (approximately 100 bps on US 10yr) since April 24.
Regarding assets we are looking at, equities are a primary focus. Increased liquidity will support sentiment, and earnings continue to come in stronger than expected.
There are plenty of attractive opportunities outside the US, particularly in Europe and emerging markets, especially if industrial activity improves.
Emerging market debt in local currency is another area of interest.
The reduction in US rates should reduce US dollar funding pressures and increase dollar liquidity globally.
This will also allow emerging market central banks (excluding China) to cut rates. Investors should benefit from foreign exchange appreciation and the duration effect of falling yields.
Finally, small cap equity presents an opportunity. The trend of lower rates and broadening of growth will provide the catalyst to unlock cheap valuations in this sector.
Chang Hwan Sung, portfolio manager, investment solutions
Invesco
The August payroll report released in early September confirmed the softening of the labour market, with weaker employment growth and negative revisions to prior months.
This development, coupled with the Fed's increased confidence that inflation is on a sustainable path back to 2%, has officially opened the door to the easing cycle, which the Fed delivered with 50 bps cut on September 18.
Now the Fed’s outlook has shifted from upside risks to inflation to downside risks to growth.
Global leading economic indicators are still indicating a soft landing, with growth below trend but stable, inflationary pressures falling, and global risk appetite decelerating for the past couple of months.
Recently our active asset allocation positions have been tilted to reflect these downside risks to growth, as our macro indicators flagged weakening market sentiment and declining growth expectations.
Against this backdrop, we are underweight equities relative to fixed income, favouring US equities and defensive sectors with quality and low volatility characteristics.
In fixed income, we are overweight duration via investment grade credit and sovereign fixed income at the expense of lower quality credit sectors.
In FX we reduce the overweight in the US dollar, as yield differentials with major foreign currencies are narrowing. However, overall higher yields and negative surprises in global growth still inform our position in favor of the greenback.
Chi Lo, senior market strategist Asia Pacific
BNP Paribas Asset Management
The US Fed’s 50bp cut reflects a Goldilocks scenario behind its view of a balanced risk between economic growth and inflation – no recession, and inflation is moving towards target.
This backdrop is positive for equities overall, with a preference for the US and emerging market Asia.
Lower rates and yields will prompt many investors to reallocate funds that they have parked at US Treasuries, certificate of deposits and money market funds to equities, especially large cap growth stocks and those that pay good dividends.
Technology and small cap stocks will also benefit as these companies carry more floating rate debt.
Benign inflation due to productivity gains (driven by AI) also means that the story for technology stocks is not over, despite the recent correction.
Gold will benefit simply because the cost of carry is lower when interest rates come down.
Lastly, lower rates will benefit investment grade (IG) credit and emerging market (EM) local currency debt.
This is because in a Goldilocks state, global (economy-wide) credit risk is falling on the back of slow growth but not recession. This should lead to a narrowing of EM local currency debt and IG credit spread over sovereign bond yields.