Executive Summary
Global equities extended their six-month rally in September, driven by a 25-basis point interest rate cut from the U.S. Federal Reserve and strong performance in the tech sector. The MSCI World index rose 3.1%, and the S&P 500 gained 3.5%. Emerging markets also performed well, increasing by 7.0%, supported by gains in Taiwan and South Korea. Taiwan's TAIEX Index grew by 6.6%, while South Korea's KOSPI index saw a 7.5% increase. Long-term government bond yields have reached generational highs across major economies, with Japan's 30-year yield at a 26-year peak, the UK's at a 27-year high, and US 30-year Treasuries at an 18-year high. This yield surge is driven by negative factors, including rising fiscal deficits, persistent inflation uncertainty, and the shift from quantitative easing to quantitative tightening by central banks. This environment has resulted in a comprehensive repricing of global risk assets, compressing equity risk premiums, and widening credit spreads. It is also forcing a rotation of capital from riskier assets back toward government bonds, which now offer more attractive yields. A persistent high-yield environment is considered the base case scenario, with a 55% probability, which will lead to a multi-year higher hurdle rate for investments and slower multiple expansion in equities.
