The Swiss bank is taking some risk off the table following the recent hawkish-sounding comments in Jackson Hole from US Fed chair Jerome Powell.

A sharp move by the US Federal Reserve to warn that interest rates will head higher has encouraged Credit Suisse to cut exposure to equities to an “underweight” asset allocation, the bank said yesterday. 

“The interest rate reset to a higher level that we are witnessing now will lead to periods of greater market volatility. In fact, markets might be willing to test how far central banks are actually prepared to go with their rate hikes at some point,” Michael Strobaek, global chief investment officer at the Swiss lender, said in a note.

Since the Fed and other central such banks, such as the Bank of England and the European Central Bank began to hike rates to curb inflation, it has prompted wealth managers to rethink asset allocation. After more than a decade of ultra-low interest rates, the change has hit equity markets. In the year to date, for example, the MSCI World Index of developed market stocks has fallen by 17.94 per cent in dollar terms.

“I firmly believe that investors need to accept periods of higher volatility and react dynamically to it. One piece of good news in all of this is that as central banks are front loading their rate hikes, the painful reset of interest rate hikes will probably be relatively short compared to historic rate hiking cycles. It is in the interest of all investors that they succeed, otherwise we may face even more pain down the road when it comes to asset prices,” Strobaek continued. 

For the time being, investors should continue to keep diversifying portfolios as broadly as possible, including alternative investments and private markets, Strobaek said. 

“Being underweight equities does not mean a complete exit from the equities markets. In my view, investors would be ill advised to sell all their holdings and leave markets completely. At inflation rates of close to 8 per cent in many countries, holding too much cash would mean a guaranteed loss in purchasing power,” he said. 

The bank noted how rapidly the Fed has changed its view on inflation. At last year’s Jackson Hole Economic Policy Symposium, Fed chairman Jerome Powell outlined why he believed that inflation was likely to prove transitory, emphasizing that it was better to err on the side of patience. At this year’s symposium, the mood was quite the opposite. Powell indicated that the Fed was determined to bring inflation lower and that they consider this to be the “overarching focus right now.” 

“These remarks confirm my conviction that although US inflation may have peaked, investors should not speculate on a quick return of the 'Fed put', nor that the Fed will make a `dovish pivot’ anytime soon,” Strobaek said. “Indeed, Powell’s speech led to a very negative market reaction – both in stocks and bonds – and I believe rightly so. Markets had factored in too much hope and not enough economic realities. Thus, the next few months are likely to become difficult for investors, and I think it is time to be prudent and reduce risk.”