Coffee Break

Last week in a nutshell

• US job growth rebounded in November after disruptions from hurricanes and strikes in October.
• Hotter US consumer prices, which rose by 2.7% YoY, and producer prices, picking up by 3% YoY, put investors on inflation alert, even ahead of the expected reflationary policy of the next administration.
• The European Central Bank (ECB) reduced its deposit rate to 3% from 3.25%, marking its fourth rate cut this year amid a weak growth outlook and fading inflation concerns in the region.
• China’s Central Economic Work Conference proposed adjusting the 2025 deficit-to-GDP ratio, reserve requirements, and interest rates, alongside plans for more special treasury bonds and a moderately loose monetary policy to support growth.

Investment convictions

Core scenario

• The US economy continues to grow above its potential, supported by robust domestic demand. However, tariffs and immigration policies introduced by the new administration will contribute to the end of disinflationary trends. This will limit the Federal Reserve's capacity for easing monetary policy, potentially constraining further economic expansion.
• In Europe, economic growth remains fragile, hindered by weak demand, low business and consumer confidence, and persistent trade policy uncertainty. The European Central Bank (ECB) is compelled to implement monetary easing measures out of necessity rather than choice, as domestic economic conditions struggle to gain momentum.
• Chinese economic growth faces headwinds as a potential 60% increase in US tariffs could reduce GDP growth by 1.5%-2%. To counter deflationary pressures and support long-term stability, China is expected to introduce further fiscal and monetary stimulus, along with structural reforms aimed at fostering sustainable growth.

Risks

• Political instability persists, but its market impact varies significantly across regions. In the euro zone, an economic revival is increasingly paramount to the end of the war in Ukraine and an easing of energy prices.
• Trade uncertainties have reached unprecedented levels, adding to global economic pressures.
• A divergence in monetary policy approaches further complicates the outlook, while Beijing remains focused on mitigating the economic and sentiment shocks caused by Trump-era tariffs.

Cross asset strategy

1. We keep an overweight position in global equities, with a clear preference for the US and Emerging Markets.
2. Strong economic fundamentals, US reflationary policies, and China’s ongoing stimulus create a supportive environment for equity markets, with upside potential driven by nominal GDP growth and improving corporate earnings.
3. Within equities, regional divergence continue:
   • The US stands out due to robust GDP growth, limited exposure to global trade risks, and policy tailwinds.
   • In contrast, the euro zone remains underweight, facing persistent political uncertainty and weak PMI data, though ECB monetary easing provides some cushion.
   • Japan benefits from structural reforms but is challenged by short-term yen volatility.
   • Emerging Markets gain traction from China’s stimulus, albeit with lingering concerns around tariff dynamics
4. From a sector perspective:
   • Our global portfolio tilts toward cyclical sectors in the US, such as financials and industrials, while adopting a more balanced approach in Europe.
   • This positioning reflects a commitment to capture regional strengths while hedging against specific risks. The flexible allocation strategy ensures we remain well-positioned to navigate an evolving macroeconomic landscape and capitalize on market opportunities.
5. Further to the equity sector allocation:
   • Within the US, we upgrade software and services from neutral to positive as we expect this sector to benefit from the diffusion of Artificial Intelligence.
   • Within European equities, we downgraded consumer staples to neutral and healthcare to a lower yet still positive stance.
6. In the fixed income allocation:
   • The strategy is slightly long duration in Europe and slightly short US duration to navigate the current market conditions. In the US, the markets remain above Fed rate projections, with short-term volatility creating indecision around long-term yields. Meanwhile European yields are shaped by pessimism regarding economic prospects, with inflation expectations at low levels and real yields at two-year lows.
   • At current levels we are prudent on France on a relative basis versus other euro zone sovereigns.
   • Within credit, we see little room for spreads to tighten further. We are neutral on investment grade and high-yield bonds, regardless of the issuers’ region.
   • We have a small exposure to emerging markets' sovereign bonds amid very narrow spreads.
7. We keep an allocation to Alternative investments and to gold.

Our Positioning

Looking ahead to 2025, our portfolio continues to reflect a preference for equities, particularly US ones, with a focus on cyclical themes, while maintaining flexibility in emerging markets. Trade policy developments and inflation trends will remain key factors guiding our adjustments.

For China and the broader emerging markets, we remain tactically optimistic, contingent on the implementation of effective stimulus measures. Conversely, we approach the euro zone with caution, given the ongoing deterioration in economic indicators. Our stance on UK and Japanese equities remains neutral.

In fixed income, we favour core European bonds, such as German Bunds, for carry opportunities, while maintaining a negative view on US duration. Across Investment Grade and High Yield bonds, we hold a neutral perspective, irrespective of regional issuers. This positioning reflects our focus on balancing opportunities and risks as we navigate the evolving global economic landscape into 2025.