Coffee Break

Last week in a nutshell

• October's Non-Farm Payroll figure came in far below expectations with only 12.000 jobs added vs. 100.000 expected. However, investors shrugged off the figure, as hurricanes and a strike at Boeing hit the numbers.
• European GDP growth figures came out higher than expected thanks to stronger than expected data in France and Germany.
• In the UK British chancellor Rachel Reeves put forward the Labour’s party’s budget, raising UK taxes by £40 billion.
• In Japan, the decision by Shigeru Ishiba, the current Prime Minister to call early elections backfired and left the country with a divided parliament that must appoint a new Prime Minister. The Bank of Japan has left interest rates unchanged.

Investment convictions

Core scenario

• The US economy is in a “sweet spot” as growth accelerates, inflation falls, the Federal Reserve eases and both presidential candidates are expected to spend massively.
• Meanwhile, the rest of the world is concerned about geopolitics and growth. Economic growth in China needs additional support and it would also be welcome in the euro zone. The ECB rate cuts should be of help.
• Inflation is cooling at a similar pace among regions, but activity has shifted into a higher gear only in the US, while China at the far end of the spectrum has been pushed into deflation.

Risks

• With US election odds evenly split, half of the electorate is bound to be disappointed. Significant spending is expected from either candidate, a floor in the short term, but increasing debt in the medium term.
• Beyond US equities, such policies, and new trade tariffs, would have a ripple effect on global markets.
• Geopolitical risks continue to pose a threat to global growth and energy prices, particularly with escalating tensions in the Middle East and the ongoing war in Ukraine.

Cross asset strategy

1. The global easing cycle and the actions of central banks offer the prospect of a more favourable growth/inflation mix and propelled many equity indices to new highs. In the short term, we brace for increased market volatility around the US elections.
2. Our positioning reflects our conviction in improving fundamentals, notably in the US where we are overweight equities. We recently added US banks and US small and mid-caps which add cyclicality to the strategy, while maintaining a long duration on European fixed income.
   • In the US, growth caution is vanishing and the Fed went above and beyond what is needed. We are overweight US equities and diversified across the market.
   • In China, the People’s Bank of China and the government have joined forces to restore confidence, laying out comprehensive measures and boosting activity. We are overweight Emerging market equities.
   • In the euro zone, economic growth remains weak and political uncertainty is here to stay. The support brought by further ECB cuts will be welcome. We keep an overall neutral stance on the region’s equity markets.
   • We are tactically neutral Japan. The country is enjoying structural tailwinds but further yen strengthening and recent political uncertainties could be a challenge.
3. In the equity sector allocation:
   • We are positive on the healthcare sector, with earnings improving and performance less dependent on broader economic conditions.
   • We are buyers of European Real Estate, which should benefit from lower interest rates.
   • We are neutral Tech sector and hold some US small and mid-caps.
4. In the fixed income allocation, government bonds are an attractive investment following the recent uptick in yields as they offer carry and a hedge in a multi-asset portfolio. Also, we see little room for credit spreads to tighten further:
   • We maintain a long-duration bias via Germany, focusing on quality issuers. We decided to cut our long duration to UK Gilts following the release of the new budget which carries potential risks for growth and inflation.
   • We are neutral on US duration.
   • We have a small exposure to emerging markets' sovereign bonds amid very narrow spreads.
   • We are neutral on investment grade and high-yield bonds, regardless of the issuers’ region.
5. We keep an allocation to Alternative investments and to gold.

Our Positioning

In the short term, we brace for increased market volatility around the US elections. Medium-term, we are currently in a global easing cycle, with most developed markets loosening financial conditions. On the bond side, central banks are progressing through this phase at different stages. This environment offers opportunities for sovereign debt investors. We maintain a long duration position, primarily focused on German bonds, and a neutral stance on US duration. In terms of credit strategy, we recognise limited potential for further spread tightening, so we hold a neutral position in corporate Investment Grade bonds and remain cautious on global High Yield.
On the equity side, our positioning is overweight, thereby reflecting our confidence in the support provided by the ongoing easing cycle. We have a preference for the US where growth is resilient. We added cyclicality to the portfolio via US banks and US small and mid-caps and are buyers of Emerging market equities.