Coffee Break

Last week in a nutshell

• U.S. retail sales rose in December, CPI increased 0.4% MoM with energy driving gains, and producer prices grew less than expected, signalling gradual progress in curbing inflation.
• China's economy grew by 5% in 2024, meeting its target but with unbalanced growth driven by industry and exports, as lagging consumption and looming US tariff hikes are casting a shadow over 2025.
• The European Central Bank cut interest rates to 3% in December to support the weakening euro zone economy, but meeting minutes reveal deep divisions over whether a more aggressive approach was warranted.
• Earnings season kicked off on a positive footing: US banks thrived in Q4, with JPMorgan, Wells Fargo, Citigroup, and Goldman Sachs posting strong earnings, while Taiwan Semiconductor rose on solid results despite risks from new US chip controls.

Investment convictions

Core scenario

• In the United States, growth remains strong, forecasted above 2% in 2025/26, but inflation dynamics are impacted by the administration’s expected tariffs and immigration measures, which limit disinflation and restrict the Federal Reserve's ability to ease significantly. This creates a divergence from global trends.
• The euro zone is struggling with growth below 1% for 4 consecutive years. The bloc is caught by external pressures and internal stagnation. The ECB rate cuts are reactive, designed to manage inflation, leaving limited room for economic revitalization.
• Emerging economies are navigating a mixed environment with low confidence in their economic prospects. Inflationary pressures in some regions persist, while deflation risks loom in others, particularly in China. The global trade uncertainty, particularly the potential for US tariff increases, further complicates their economic strategies, leading to uneven growth and inflation outcomes.

Risks

• Geopolitical tensions and the unpredictability of trade policies and diplomatic relations pose significant risks to market stability and to smaller countries.
• The uncertainty surrounding Donald Trump’s presidency, particularly regarding tariffs, taxation, deregulation, and immigration policies creates a complex and volatile policy landscape for investors.
• Diverging central bank policies worldwide could exacerbate asset price volatility, driven by differing inflation trajectories and monetary strategies.

Cross asset strategy

1. Our outlook for equities is moderately positive and has become concentrated on the US region.
   • The US is driven by robust, above-potential, economic growth and resilient corporate earnings. In the short term, uncertainty is slightly higher as Donald Trump moves back into the White House.
   • We have a particular focus on the cyclical sectors that are expected to benefit from domestic policies.
   • In contrast, European profit growth remains relatively weak. It could however be boosted by a weakening in the currency and investor positioning has rarely been so low. Structural challenges and political uncertainty prevail especially in France and Germany.
   • Amid a lack of confidence from investors and domestic consumers and the increase in US tariffs risk, we downgrade our views on Emerging markets equities to neutral.
   • The stance on Japan is neutral.
2. In fixed income:
   • We hold a short US duration, reflecting concerns about potential inflationary pressures tied to policy uncertainty under the new US administration.
   • We prefer a long German duration and European credit, supported by a favourable interest rate and low-growth environment. European bonds also serve as a hedge, given their negative correlation to equities in a disinflationary environment.
3. 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.
4. 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

Our asset allocation strategy is based on a soft-landing scenario, primarily for the US economy. The current US exceptionalism calls for an overweight US equity while we proceed with caution in the rest of the world. We downgrade our views on Emerging markets pending Donald Trump’s first executive orders. We are underweight European equities but a weaker EUR could be a blessing in disguise. We remain neutral Japan.
Our fixed income strategy is geared towards a long European vs a short US duration while we remain neutral credit, high yield and emerging markets debt. We remain long US dollar and Japanese yen.