The Fed is on hold, still time to add risk on dips

The Fed has once again lowered its 'dots' and inflation projections for the coming years; the longer run Federal fund rate is now at 3.5% (was 3.8% in June). Economists think the Fed is preparing the floor for a smooth and gradual normalisation of its monetary policy, with a first move by the end of the year. Economists expect lift-off to come as a relief to markets. Also, having lived in a relatively expensive world, this summer's correction has helped make risky assets more attractive.

 "We now have 19% exposure to US equities in our portfolio, up from 17% in June. The S&P 500 index corrected by more than 12% this summer, hence valuation is now more attractive. Our US equity risk premium is back above its long-term average. The ultra-low dispersion of US equities - which has been biased toward sector picking and often associated with a bear market sentiment - is overdone in our view and should correct higher from here. However, we find other markets relatively more attractive, notably eurozone equities with 18% allocation vs 16% in June", says Societe Generale.

Highest returns are expected from the US market, as breakeven valuations are low, real yields have increased by a decent amount (not the case for the UK or euro area) and prospects for growth and inflation appear clearer. US Linkers are also a way to add exposure to the US dollar.

"US dollar to remain strong but no fast appreciation from here Smooth normalisation of Fed monetary policy is unlikely to drive further strong dollar appreciation. Indeed, the short end of the curve (the 2-year bond yield rallied by c. 11bp after the FOMC statement), a US dollar driver, is likely to remain at its lowest level compared to the past. We are still expecting the US dollar to reach parity versus the euro by March 2016, a point in time when we think the ECB is likely to announce further quantitative easing beyond September 2016",added Societe Generale.