Banco Carregosa anticipates that investors will switch to alternative investments as interest rates fall

With the gradual reduction in interest rates, investors are likely to reallocate their portfolios to the bond market with longer maturities, and then from the bond market to equity markets and alternative assets, such as precious metals, real estate and infrastructure, argues Carregosa in its Autumn Outlook.

Investment in alternative assets is becoming more attractive with the interest rate cuts by the main central banks, but the usual dispersion of performances requires a rigorous selection, argues Banco Carregosa in its Autumn Outlook, where it gives the outlook for the next quarter.

"With the gradual reduction in interest rates by central banks, investors are likely to reallocate their portfolios, moving their investments in liquidity and term deposits to the bond market with longer maturities, and then from the bond market to equity markets and alternative assets, such as precious metals, real estate and infrastructure”, says Chief Investment Officer, Mário Carvalho Fernandes.

The US economy continues to exceed expectations, maintaining resilient growth despite signs of a slowdown during the third quarter. The interest rate cut cycle began with a 50 basis point reduction, which should continue to support the economy. "Therefore, a much anticipated recession may be avoided, for now, contrary to warnings of a slowdown. With no recession in sight, equity markets have remained strong, renewing historical highs, supported by positive economic prospects”, says the economist. Banco Carregosa highlights that the absence of a significant slowdown in the world's largest economy has had a positive impact on the value of financial assets most exposed to the economic cycle, so that the equity market and bonds with greater credit risk have performed positively and maintain positive prospects based on the possible continuation of this favorable scenario. "Equity markets continue to trade at high multiples, justified by the stronger-than-expected economic performance. On the other hand, the market for sovereign bonds with low credit risk has already largely incorporated the expectations of interest rate cuts expected in the coming months, so it is expected that they will now show a more neutral performance”, according to the analysis.

Carregosa says that despite the optimism, there are still risks of a deeper economic slowdown before a more sustained recovery of the economy.

"In this context, investment in bonds with high credit quality continues to play a role in protecting portfolios”, argues the bank.

"Alternatively, in a scenario of global economic acceleration in 2025 in which global economies accelerate in a synchronized manner in 2025, as some analysts predict, there is a risk of overheating that could generate a new wave of inflation, and this framework should continue to be present in the construction of investment portfolios”, warns Carregosa, however.

The stimulus measures recently announced by local authorities for the Chinese economy could be decisive for a synchronized recovery next year in China, Europe and the US.

"Finally, the geopolitical environment remains uncertain, with the potential for conflicts to escalate and destabilize the global economy. The US presidential elections, scheduled for November 5, are another factor that could significantly change the course of events,” according to the chief economist.

In this context of uncertainty, but with a benign central scenario, Carregosa says that investors "should continue to take advantage of the benefits of diversification, optimizing their exposure and benefiting from a favorable performance of their investments in terms of the return and risk binomial”.

In detail, the Outlook highlights that "the transition from a high interest rate environment to a cycle of cuts has been less damaging than initially expected. Highly leveraged companies, particularly those classified as high yield, have been able to refinance their debt, despite the new coupons being significantly higher.”

However, "operating margins have been falling in some sectors, such as the automotive sector, where some profit warnings have been issued”.

"Despite this, default rates remain low, although caution is advised with regard to issues with a rating below B, which present a higher risk of default”, the bank notes.