Coffee Break

Last week in a nutshell

• Nonfarm payrolls rose by 143K, while revisions lowered last year’s average job growth to 166K from 186K. The data reflects a cooling yet resilient labour market that supports growth without stoking inflation—reinforcing the Fed’s cautious stance on further rate cuts.
• The market sell-off was brief as the US postponed tariffs on Canada and Mexico by 30 days, while new tariffs on China remained in place.
• US earnings saw record corporate sentiment and an 8% beat, led by Financials, though tariff risks is looming. European earnings beat forecasts, but guidance remained cautious.
• The euro zone's preliminary inflation rose to 2.5%, staying above the ECB’s target, while the BoE cut rates, for the 3^rd time in 6 months, and halved its 2025 growth forecast, citing economic uncertainty.

Investment convictions

Core scenario

• In the US, expectations for 2025 point to robust economic growth. We anticipate 2.6% GDP growth, driven by strong labour market dynamics, robust consumption, and increased investment in technology sectors. Consumer spending remains a vital driver, buoyed by rising disposable incomes and relatively low unemployment rates.
• The euro zone’s expected GDP growth of 0.9% in 2025 reflects structural challenges, including sluggish productivity and demographic headwinds. Supportive monetary policy and targeted investments in green energy and infrastructure offer glimmers of optimism to maintain an expansion.
• Emerging markets, especially those closely linked to China’s economy, face challenges as the US shifts toward protectionist policies. Until now, it was a relief that the new administration did not announce any immediate tariffs measures on China.

Risks

• Geopolitical tensions and the unpredictability of trade policies and diplomatic relations pose significant risks to market stability and to smaller countries.
• Rising bond yields, closely linked to the risk of inflationary measures via higher tariffs and lower immigration-linked labour market supply, constitute a risk to our central scenario for the US.
• Beyond the impact on inflation, tariff-related disruptions could reduce global trade volumes, weaken investor confidence, and amplify currency volatility, creating therefore headwinds for growth.

Cross asset strategy

1. We start Q1 2025 with an overall slight overweight stance on global equities. Our approach is increasingly sector-balanced, as we upgrade US healthcare, and geographically-balanced as the competition for leadership in artificial intelligence is fierce, the euro zone may benefit from a weaker currency and China may get a respite if a trade war is avoided.
   • The US is driven by robust, above-potential, economic growth and resilient corporate earnings. In the short term, uncertainty is slightly higher, fuelled by the introduction of a new Chinese IA model and new tariffs with various magnitude, target and start dates.
   • We have a particular focus on the cyclical sectors that are expected to benefit from stimulative domestic policies.
   • Following years of underperformance relative to the US, improving business sentiment indicators, a cheaper currency, a dovish central bank, and a better profit growth outlook have created a more favourable setup for European equities at the turn of the year. While structural challenges and political uncertainty persist, the combination of cheap valuation and historically low investor positioning imply that euro zone equities deserve a more balanced allocation.
   • Ahead of the Chinese National People’s Congress "Two Sessions" scheduled in March, we are neutral Emerging markets equities with some nuance. We are positive on China vs India as Donald Trump’s initial speeches on trade tariffs focused on Mexico and Canada. This tactical shift assumes that while a trade war remains a risk, it does not fully materialize and remains a threat instead.
   • The stance on Japan is neutral.
2. 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.
3. On sovereign bonds:
   • We are long duration in Europe.
   • We are short in the US.
   • We have a neutral allocation towards emerging market debt.
4. On credit:
   • We remain overall neutral on Investment Grade and High Yield, as spreads are tight while very few defaults are expected to occur.
5. Alternatives play a crucial role in portfolio diversification:
   • Gold is favoured for its protective qualities against market volatility and geopolitical risks, despite recent pressure from a stronger dollar and rising US real interest rates.
6. In currencies, exchange rates will remain a focal point in trade discussions and broader market dynamics:
   • The outlook for the US dollar remains complex, as domestic policy dynamics may both support and limit its appreciation. For now, we hold a long USD position.
   • The Japanese yen may appreciate in response to global economic stabilization and its safe-haven status.

Our Positioning

As we move further into Q1 2025, financial markets continue to demonstrate resilience, supported by ongoing global growth, accommodative monetary policies and strong profit growth in the technology sector. In this context, we keep an overall slight overweight stance on global equities with a more balanced approach in terms of sectors, as we upgrade the US healthcare, and in terms of geography, as we recently upgraded the euro zone and China vs India. Regarding fixed income, we keep our preference for duration in core Europe (Germany) as we expect low growth for 2025 and further ECB rate cuts. Conversely, we are negative on US duration. The risk for US yields remains on the upside, and the future will depend on the policies of the new administration. We remain long US dollar and Japanese yen.