Coffee Break

Last week in a nutshell

• On the macro front, Flash PMIs came out mixed, showing a notably weaker Manufacturing print in the US.
• In Germany, the ZEW Economic Sentiment index surged above expectations, confirming the strong momentum on equity markets for the region as well.
• The annual inflation rate in the UK accelerated to 3% last month, up from 2.5%, and above forecasts of 2.8%.
• On the geopolitical front, US and Russian foreign ministers met in Saudi Arabia to start discussing the potential of Ukraine ceasefire talks.

Investment convictions

Core scenario

• The US is projected to grow above 2% in 2025/26, but tariffs and immigration measures will prevent disinflation, limiting Fed easing. This may create a divergence where US growth and inflation move in opposite directions compared to other regions.
• The euro zone faces growth below 1% for three consecutive years (2024-2026), with the ECB cutting rates out of necessity due to weak domestic conditions. Growth and inflation are expected to lag behind the US.
• China’s economy is struggling with low confidence and the risk of US tariff hikes. China is waiting for new US tariff announcements before committing to further stimulus, adding to global policy divergence.

Risks

• Geopolitical tensions and the unpredictability of trade policies and diplomatic relations pose significant risks to market stability and to smaller countries.
• Among the diplomatic unpredictability, markets are focused on the end of the war in Ukraine as a positive sign for the euro and the European stocks. European politicians have been marginalized in the process to date.
• Rising bond yields, closely linked to the risk of inflationary measures via higher tariffs and lower immigration-linked labour market supply, constitute a risk to our central scenario for the US.
• Beyond the impact on inflation, tariff-related disruptions could reduce global trade volumes, weaken investor confidence, and amplify currency volatility, creating therefore headwinds for growth.

Cross asset strategy

1. We have started 2025 with an overall overweight stance on global equities. Our approach is increasingly sector-balanced, as we upgraded the US Healthcare, and geographically-balanced, as there is renewed interest for China and the euro zone. The first may get a respite if a trade war is avoided and the latter is at the crossroads.
   • The euro zone is at the crossroads between an Ukraine ceasefire, the German election outcome, and the risk of tariffs. In the meantime, a weaker currency is helping. For now, improving business sentiment indicators, a dovish central bank, and a better profit growth outlook have created a more favourable setup for European equities. While structural challenges and political uncertainty persist, the combination of cheap valuation and historically low investor positioning imply that euro zone equities deserve a more balanced allocation.
   • Ahead of the Chinese National People’s Congress "Two Sessions" scheduled in March, we are neutral Emerging markets equities with some nuance. We are positive on China vs India as Donald Trump’s initial speeches on trade tariffs focused on Mexico and Canada. This tactical shift assumes that while a trade war remains a risk, it does not yet fully materialize and remains a threat instead.
   • The US is driven by robust, above-potential, economic growth and resilient corporate earnings. In the short term, uncertainty is slightly higher, fuelled by the introduction of a new Chinese IA model and new tariffs with various magnitude, target and start dates. We have a particular focus on the cyclical sectors, which are expected to benefit from stimulative domestic policies.
   • The stance on Japan is neutral.
2. In fixed income, the divergence in monetary policies between advanced and emerging economies adds complexity to the global financial environment. While rate cuts in developed markets enhance liquidity, emerging economies face tighter monetary conditions due to currency pressures and inflationary risks. This dichotomy underscores the importance of selective positioning in fixed income markets.
3. On sovereign bonds:
   • We are slightly long duration in Europe, with a preference over US debt.
   • We have a neutral allocation towards emerging market debt.
4. On credit:
   • We remain overall neutral on Investment Grade and High Yield, as spreads are tight while very few defaults are expected to occur.
5. Alternatives play a crucial role in portfolio diversification:
   • Gold is favoured for its protective qualities against market volatility and geopolitical risks.
6. In currencies, exchange rates will remain a focal point in trade discussions and broader market dynamics:
   • The outlook for the US dollar remains complex, as domestic policy dynamics may both support and limit its appreciation. For now, we hold a slightly long USD position.
   • The Japanese yen may appreciate in response to global economic stabilization and its safe-haven status.

Our Positioning

We maintain an overweight stance on global equities, adopting a more balanced approach across sectors and regions. Notably, we have a renewed interest in Europe and China, as the catch-up trade in these regions still has potential upside: a range of macroeconomic, geopolitical, and technological factors have introduced notable shifts that investors must carefully assess. The key question remains whether these changes are temporary fluctuations or structural transformations. Regardless, they are actively shaping market trends and investment strategies. In fixed income, we keep our preference for duration in core Europe (Germany) as we expect low growth for 2025 and further ECB rate cuts. Conversely, the risk for US yields remains on the upside. We remain long US dollar and Japanese yen.