Coffee Break

Last week in a nutshell

• Germany’s election outcome boosted market sentiment in European equities, with hopes for growth, lower corporate taxes, and fiscal spending for defence and infrastructure.
• Investors weighed Donald Trump’s new tariff pledges while Technology shares tumbled after Nvidia's earnings, together with its profit outlook, raised doubts.
• US consumer confidence fell sharply while households’ inflation expectations are no longer anchored.
• A decline in US personal spending confirmed weak retail sales while headline and core PCE inflation edged down in January.

Investment convictions

Core scenario

• The US is projected to grow above 2% in 2025/26, but tariffs and immigration measures will prevent disinflation, limiting Fed easing. This may create a divergence where US growth and inflation move in opposite directions compared to other regions.
• The euro zone faces growth below 1% for three consecutive years (2024-2026), with the ECB cutting rates out of necessity due to weak domestic conditions. Growth and inflation are expected to stay below the rates seen in the US.
• China’s economy is struggling with low confidence and US tariff hikes. The National People’s Congress is set to announce further stimulus.

Risks

• Geopolitical tensions and the unpredictability of trade policies and diplomatic relations pose significant risks to market stability and to smaller countries.
• Canada and Mexico are set to join China in being hit by US tariffs. Also, 25% US tariffs on global steel and aluminium are slated to begin this month.
• 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.
• In the US, there is a domestic risk that the labour market stops tightening as trade and DOGE uncertainty moderate demand.
• Among the diplomatic unpredictability, markets are focused on the end of the war in Ukraine as a positive sign for the euro and the European stocks. European politicians have been marginalized in the process to date.

Cross asset strategy

1. We have started 2025 with an overall overweight stance on global equities. Our approach is sector- and geographically-balanced across Europe, China and the US.
   • The euro zone is at the crossroads between an Ukraine ceasefire, and the risk of US tariffs. In the meantime, a weaker currency is a support for exporters. For now, improving business sentiment indicators, a dovish central bank, and a better profit growth outlook have created a more favourable setup for European equities. The combination of cheap valuation and historically low investor positioning represent tailwinds. We are exposed to industrial and mid-cap stocks, which have shown signs of a trend reversal, offering catch-up potential compared to large caps.
   • Ahead of the Chinese National People’s Congress "Two Sessions", we are neutral Emerging markets equities with some nuance. We are positive on China vs India.
   • So far, the US is driven by robust, above-potential, economic growth and resilient corporate earnings. In the short term, uncertainty has risen, fuelled by the introduction of a new Chinese IA model, new tariffs and uncertainty regarding domestic spending cuts. We have a particular focus on financials and healthcare.
   • 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, with a preference over US debt.
   • 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:
   • Precious metals like silver and gold remain attractive as hedges against inflation and economic uncertainty.
6. In currencies, exchange rates will remain a focal point in trade discussions and broader market dynamics:
   • For now, we hold a slightly long USD position while domestic policy dynamics may both support and limit its appreciation.
   • The Japanese yen may appreciate in response to global economic stabilization and its safe-haven status.

Our Positioning

We maintain a slightly positive stance on global equities, adopting a more balanced approach across sectors and regions. Notably, we have a renewed interest in Europe and China, as the catch-up trade in these regions still has potential upside: a range of macroeconomic, geopolitical, and technological factors have introduced notable shifts that investors must carefully assess. The key question remains whether these changes are temporary fluctuations or structural transformations. Regardless, they are actively shaping market trends and investment strategies. In 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, the risk for US yields remains on the upside. We remain long US dollar and Japanese yen.