Stock markets are running hot and ignoring lower interest rate expectations

In the wake of cautious communication from the U.S. Federal Reserve, markets have significantly reduced their expectations for imminent interest rate cuts over the past weeks: While two rate reductions by May this year were priced in at the end of 2023, the first adjustment is now expected only in June.

This development is entirely in line with the Fed's stance, whose representatives emphasize on various occasions their intention not to act prematurely and to observe the further economic development before announcing interest rate steps.

The stock markets saw significant gains in the final quarter of 2023, buoyed by market participants' hopes for upcoming interest rate cuts in the spring of 2024. The correlation of these expectations with the performance of the S&P 500 was high, at 85% by the end of the year.

However, since the last official meeting of the U.S. Federal Reserve on January 31, 2024, this relationship has dissolved, and the two curves are diverging in opposite directions (graph).

This raises the question of whether the stock markets are due for a correction soon. Naturally, technology stocks are currently being driven strongly by the hype surrounding NVIDIA Corp and AI in general, yet it is striking how little impact the significantly reduced expectations for interest rate cuts have had on the stock markets so far.

In this environment, convertible bonds represent an interesting investment opportunity: With their unique asymmetric risk/return profile, it is still possible to participate in potentially rising stock markets, while they offer a certain level of protection on the downside in the event of a correction, thanks to the bond component.

With the H.A.M. Global Convertible Bond Fund and its associated active investment strategy, which invests in the most attractive opportunities in the convertible bond universe regardless of a benchmark index, it is still possible to seize existing opportunities in the markets while benefiting from the convexity in potential downward movements.

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