Coffee Break

Last week in a nutshell

• The Fed cut rates for the first time in 4 years and by 50bps, reminding investors of its dual mandate and appearing prepared to step up to 50bp again if ever needed.
• The BoE kept rates unchanged, as inflation data remains challenging. Similarly, the BoJ held steady, leading to a weakening of the yen.
• The euro zone consumer confidence ticked slightly higher than expected, according to preliminary estimates, marking the highest level since February 2022.
• Despite persistent affordability challenges, signs suggest the US real estate market is gradually shifting in favour of buyers.

Investment convictions

Core scenario

• We remain confident in a soft landing of the US economy despite recent volatility, election jitters, seasonal challenges, and higher market volatility compared to H1 2024.
• While the deflationary environment continues in China, both the ECB and the Fed are easing policy. This marks the starting point of a normalisation in the yield curve, after more than two years of inversion.
• US growth forecasts for 2025 are increasingly influenced by political and monetary factors. European growth continues to disappoint and is paramount to a pick-up in business and consumer activity. China's growth remains subdued.

Risks

• Looking ahead, we caution against policy decisions that lead to higher tariffs and a tighter labour market in the US, which could ultimately lead to rising inflation again or significantly higher taxes, which could weigh on growth.
• Besides the US presidential campaign being one of the most dramatic and chaotic ones, the upcoming change in the White House may bring a reprioritisation of US economic policy, thereby impacting speed and extent of monetary easing.
• Geopolitical risks to the outlook for global growth remain tilted to the downside with the war between Russia and Ukraine, the potential resumption of international trade tariffs, and developments in the Middle East.

Cross asset strategy

1. The discussed mix of rising growth and political uncertainties supports short-term caution, leading us to an overall Neutral stance on equities.
2. We prefer developed markets vs emerging markets, and besides the US, also invest in UK equities.
   • In the US, we are exposed to the broad market.
   • In the UK, valuations remain attractive with the potential for multiple expansion and the BoE poised to cut interest rates.
   • In the euro zone, conservative veteran Michel Barnier was appointed as France’s prime minister, and after months of political uncertainty triggered by a snap legislative election, the country seems poised to form a new government.
   • We are tactically neutral Japan as further yen strengthening and emerging political uncertainties could be a challenge.
   • We are neutral emerging markets, as the Chinese consumer has yet to gain confidence and deflationary pressure persists.
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 Small caps & Tech sector.
4. In the fixed income allocation, government bonds are an attractive investment as they offer carry and a hedge in a multi-asset portfolio. Also, we see little room for credit spreads to tighten further:
   • We favour carry over spreads, with a focus on quality issuers: we maintain our long-duration bias via Germany and recently took profit on our exposure to UK sovereign debt.
   • We are neutral on US duration.
   • We have a relatively 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

We maintain a constructive outlook on equities but proceed cautiously in the short term. We also take into the upcoming yield curve steepening – whether via a bull or a bear steepening – which will have major consequences for investors too.
Within equities, we keep a neutral positioning, with a preference for the broad US market. On this side of the Atlantic, we prefer UK equities relative to the euro zone. In our sector allocation, we are overweight global Healthcare for its defensive quality, European Real Estate for its interest rate sensitivity and neutral US Technology and Small Caps.In our bond strategy, we take into account the correlation between equities and bonds which is reverting. We focus on safe bonds that fulfil their protective role within a diversified portfolio. We maintain a long duration via German bonds. Simultaneously, we remain neutral on corporate investment grade and more cautious on global high yield.