Coffee Break

Last week in a nutshell

• The Federal Reserve expects slower growth and higher inflation, but appears ready to cut rates twice in 2025.The SNB cut rates amid low inflation, while the BoE and the BoJ held steady.
• In the US, homebuilder sentiment dropped amid rising costs and labour shortages, while retail sales lagged expectations.
• In Germany, the Bundestag approved a constitutional change, confirming a spectacular change of mindset regarding strict fiscal austerity and signalling stronger EU defence and growth efforts.
• In the euro zone, consumer sentiment improved as households grew less pessimistic, though personal finances stayed stable.
• Despite a tentative agreement between Ukraine and Russia, led by diplomatic efforts from US President Trump, the ceasefire compliance remained uncertain.

Investment convictions

Core scenario

• US growth is suddenly at risk as trade policy uncertainty (TPU) and DOGE policy uncertainty (DPU) weigh on confidence, while tariffs and “efficiency” measures dampen economic momentum.
• In Europe, fiscal policy, particularly in Germany, is finally becoming more expansive, but with slowing wages, easing inflation, and looming US tariffs, the ECB remains on track to cut rates further this year.
• China’s muted response to US tariffs, coupled with persistent deflation and limited stimulus, raises questions regarding the upcoming measures to decisively improve consumer sentiment.

Risks

• Monetary policy expectations continue to diverge: The Fed remains cautious amid US growth fears, while European fiscal spending could jeopardise hopes for massive ECB easing, creating uncertainty in rate paths.
• The economic and trade policy uncertainty is weaving its way through the globe: Elevated policy uncertainty across G7 nations, particularly in North America, continues to weigh on business confidence and market stability.
• Escalating US tariffs keep making the headlines. With tariffs still in the early stages and major announcements scheduled for April 2^nd, the risk of further trade disruptions and retaliatory measures remains a key threat to global supply chains and financial markets.

Cross asset strategy

1. Our cross-asset strategy reflects a more cautious stance across asset classes and sectors. This shift implies rebalancing equities away from the US. Overall equity exposure has been somewhat reduced, particularly in US markets, where growth expectations and sentiment has turned more defensive. In fixed income too, the strategy also signals a preference for safer assets.
2. Within equities:
   • We have an underweight stance on US equities as rising growth risks and policy uncertainty challenge the sustainability of “US exceptionalism”. Trade tensions, fiscal concerns, and monetary policy constraints are weighing on corporate earnings expectations, while stretched valuations leave little margin for error.
   • In contrast, European equities may benefit from a shift toward fiscal stimulus, and select emerging markets offer attractive opportunities. Nevertheless, trade war risk loom and temper the perspective. We are neutral European and Emerging markets equities with less nuance: China's recent outperformance relative to emerging markets and the S&P 500 likeliness to moderate, as the bulk of stimulus announcements are behind us and earnings season is largely over.
   • The stance on Japan is neutral.
3. Within sectors:
   • We remain selective, tilting toward defensive sectors with stable earnings profiles while reducing exposure to areas more sensitive to economic slowdown risks, a move that aligns with a late-cycle environment where defensive positioning becomes key.
   • In Europe, fiscal spending creates a more favourable environment for long-term investors, mainly through industrial and mid-cap stocks.
   • In the US, we have reduced our exposure to US Financials as growth concerns, policy uncertainty, and a cautious Fed weigh on the sector’s earnings outlook. Slower loan growth and tighter credit conditions could further pressure profitability.
   • In both the US and Europe, we look for companies with defensive characteristics which tend to outperform in periods of slowing growth and heightened volatility.
4. In fixed income, there is growing appeal for safer assets. We maintain a constructive stance on duration, as slowing growth and policy uncertainty support demand for high-quality bonds.
5. On Sovereign bonds.
   • European sovereign bonds remain supported by an accommodative ECB and fiscal stimulus efforts. We are positive on the Bund.
   • We have a neutral stance on US Treasuries, as growth risks, trade tensions, and a patient Fed reinforce their role as a safe-haven asset. With monetary policy remaining reactive and inflation pressures subdued, yields have room to decline further.
6. On credit:
   • We remain neutral on Investment Grade.
   • The underweight positioning in European and US high-yield bonds illustrates our more cautious stance, as investors reduce exposure to credit risk. Rising economic uncertainty and slowing growth increase credit risk. While spreads remain relatively tight, weaker corporate fundamentals, potential earnings pressures, and policy uncertainty—particularly in the US—make the risk-reward less attractive.
7. We have a neutral allocation in emerging market debt: a weakening US dollar and 10-year yields are headwinds.
8. Alternatives play a crucial role in portfolio diversification:
   • Precious metals like silver and gold remain attractive as hedges against inflation and economic uncertainty.
9. In currencies, exchange rates will remain a focal point in trade discussions and broader market dynamics:
   • The Japanese yen may appreciate further in response to higher rates in the region and its safe-haven status.

Our Positioning

  In the short term, navigating markets will require a pretty balanced approach that accounts for heightened uncertainty and rapidly evolving macroeconomic conditions. The recent adjustments made reflect a shift toward greater caution, emphasizing quality and resilience over riskier assets. This shift implies rebalancing equities away from the US as there is a clear recognition of headwinds such as slowing growth, tighter financial conditions, or increased volatility. In fixed income, we are long EU duration and neutral US sovereign duration. We keep investment grade bonds but are underweight in high-yield bonds to reduce exposure to credit risk.