Coffee Break

Last week in a nutshell

• US CPI rose 2.4% YoY, slightly more than expected, but by the smallest amount since February 2021, keeping the Fed easing on track.
• The Fed's September minutes showed most officials backed a half-point rate cut, but there was agreement this step wouldn't dictate future cuts.
• In France, the 2025 budget release confirmed substantial fiscal tightening which should weigh on growth, if implemented. Since 1978 France has recorded only one year (2013) when consolidation measures were larger.
• In Japan, new Prime Minister Shigeru Ishiba dissolved the Lower House and called a snap election on October 27^th.

Investment convictions

Core scenario

• The US are 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.
• 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

• Geopolitical risks continue to pose a threat to global growth and energy prices, particularly with escalating tensions in the Middle East and the unlikely participation of Russia in peace talks with Ukraine.
• 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.

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.
2. Our positioning reflects our conviction in improving fundamentals: we are overweight equities, while maintaining a long duration on European fixed income.
   • In the U.S., growth caution is vanishing and the Fed is going above and beyond what is needed. We are overweight US equities.
   • 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 emerging 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 start to re-enter the UK Gilts segment as yields have picked up by 50bps within a month, offering an attractive entry point.
   • 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

We are in a global easing cycle as most developed markets are easing financial conditions but major central banks are at varying points within this phase. This presents opportunities for investors.
We added some UK Gilt to our fixed income allocation as we believe that the UK should continue to ease rates too. The bond strategy has otherwise remained stable, with a long duration via German bonds, a neutral allocation to corporate investment grade and caution on global high yield.
Our overweight strategy on equities reflects our confidence in the support provided by the easing cycle. We have a preference for the US where growth is resilient, and a more tactical approach to Emerging markets where the Chinese market recently gained momentum.