Last week in a nutshell
- EU leaders discussed enhancing military capabilities through fiscal flexibility and increased borrowing, triggering a rise in bond yields.
- The ECB cut interest rates to 2.5% as inflation is cooling in the region. Looking forward, threats from US tariffs and increased fiscal spending represent “phenomenal uncertainties”.
- The US added 151K jobs last month, with unemployment rising to 4.1%. Federal government jobs fell by 10K.
- China’s 2025 Government Work Report focuses on boosting economic growth by strengthening domestic demand.
What’s next?
- Domestic challenges in the US will be in the spotlight as a government funding deal to avoid a shutdown and preliminary readings of the Michigan survey will provide insights into current consumer sentiment and inflation expectations will be scrutinised.
- Several ECB board members will speak as the central bank navigates challenges like inflation, economic growth, US tariff threats, and financing military support for Ukraine.
- On the data front, publications on US inflation readings, and key euro zone members' industrial production will keep economic activity and price trends in focus.
- On the geopolitical front, Ukrainian and Russian leaders are set to meet in Saudi Arabia, while Canada’s governing Liberal party will elect a new leader and prime minister, and more US tariffs on steel and aluminium are taking effect.
Investment convictions
Core scenario
- In the US, the sharp increase in trade uncertainty is eroding confidence and trickling down economic growth, which is still projected to grow above 2% in 2025/26.
- 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. Increased fiscal spending for defence will be a support for the economy.
- China aims to achieve approximately 5% economic growth in 2025, despite increasing debt and budget deficits. Expanding fiscal stimulus shall support consumer spending and offset economic pressures.
Risks
- A tit-for-tat tariffs war has started as the US imposed a 25% tariff on Chinese imports and announced similar tariffs on Canadian and Mexican imports, which were later delayed, in part, until April 2025, following negotiations.
- Beyond the impact on inflation, tariff-related disruptions reduce global trade volumes, weaken investor confidence, and amplify currency volatility, creating therefore headwinds for growth.
- In the US, there is a domestic risk that the labour market stops tightening as trade and DOGE uncertainty weigh on demand and employment.
Cross asset strategy
- We have started 2025 with an overall overweight stance on global equities. Our approach is sector- and geographically-balanced across Europe, China and the US. Volatility went up but we stay the course:
- The euro zone is at the crossroads between an Ukraine ceasefire, increased fiscal spending, and the risk of US tariffs. 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. We are exposed to industrial and mid-cap stocks, which have shown signs of a trend reversal, offering catch-up potential.
- We are neutral Emerging markets equities with some nuance. We are positive on China vs India, as investors are flocking back to the former.
- So far, the US is driven by robust, above-potential, economic growth and resilient corporate earnings but the US consumer is feeling less confident. In the short term, uncertainty has risen, fuelled by the introduction of a new Chinese IA model, new tariffs and uncertainty regarding domestic spending cuts. We have a particular focus on healthcare.
- The stance on Japan is neutral.
- 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.
- On sovereign bonds:
- We are long duration in Europe, with a preference over US debt.
- We have a neutral allocation towards emerging market debt.
- On credit:
- We remain overall neutral on Investment Grade and High Yield, as spreads are tight while very few defaults are expected to occur.
- Alternatives play a crucial role in portfolio diversification:
- Precious metals like silver and gold remain attractive as hedges against inflation and economic uncertainty.
- In currencies, exchange rates will remain a focal point in trade discussions and broader market dynamics:
- Currently, the Japanese yen may appreciate in response to higher rates in the region and its safe-haven status.
Our Positioning
Amid an increased volatility on financial markets, we maintain a slightly positive stance on global equities, and a balanced approach across sectors and regions. The key question remains whether the recent shifts are temporary fluctuations or structural transformations. Regardless, they are actively shaping market trends and investment strategies. Europe and China have upside potential amid a range of macroeconomic, geopolitical, and technological factors. 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. We remain long Japanese yen.