Coffee Break

Last week in a nutshell

• Financial markets had a tumultuous week marked by an US-China all-out trade war and a dramatic loss of confidence in US assets as anchors of market stability.
• The preliminary April survey on US Consumer Sentiment and Inflation Expectations revealed a new sharp deterioration as price expectations soared to their highest level since 1981.
• US consumer and producer prices for March came out lower-than-expected, but that was before the announcement of new tariffs.
• The Q1 2025 earnings season started with reports of major banks. JPMorgan Chase CEO Jamie Dimon warned of “considerable turbulence” ahead for the US economy.

Investment convictions

Core scenario

• Higher tariffs and rising uncertainty, coupled with weaker growth and tighter financial conditions will weigh on consumer spending, corporate investments and asset valuations.
• In the US, growth is weakening under the weight of self-imposed tariffs, while inflationary pressure will rise, hampering the Fed’s ability to cushion the blow. Outside of the US, the hit from tariffs to growth should also be felt.
• Europe mitigates the negative impact thanks to fiscal support and diversified trade ties, and the potential monetary easing from ECB which has some space to cut rates as inflation recedes.
• China’s fragile recovery is challenged by deepening deflation and massive retaliation in the trade conflict amid rising geopolitical tensions. The Politburo is meeting at the end of April.

Risks

• Growth fears are intensifying as tariff announcements reshape monetary policy expectations, with the Fed now expected to act, highlighting the growing strain on global financial markets, supply chains and the economic outlook.
• Companies face major disruptions and uncertainty due to tariff barriers, leading to delay production and investments while lowering profit estimates.
• Tariffs are being used as tools for revenue generation, national security, and geopolitical leverage—raising the risk of prolonged trade tensions and structural damage to international cooperation and supply chain resilience.
• As a US–China confrontation escalates—with tariffs at the centre—global risks intensify, and the question remains: who wants to deal in Mar-a-Lago when confrontation, not cooperation, sets the tone?

Cross asset strategy

1. Amid heightened macroeconomic uncertainty and increasing policy-related headwinds, our cross-asset strategy remains cautiously positioned, emphasizing downside protection and diversification.
2. Global equities:
   • We maintain an overall negative stance on global equities, reflecting concerns over earnings revisions, weaker global growth prospects, and growing geopolitical tensions.
3. Regional allocation:
   • We are negative on US equities, where both valuations and earnings growth assumptions face downside pressure. The erratic tariff rhetoric threatens the long-standing US exceptionalism narrative, putting further strain on equity multiples.
   • We are slightly negative on the euro zone and Emerging Markets equities. The euro zone faces a delicate balance between fiscal stimulus and trade tensions, while Emerging Markets—especially China—are directly in the line of fire amid escalating trade conflict.
   • Japan’s structural tailwinds are noted, but the strength of the yen and trade pressures undermine near-term upside.
   • We are neutral on the UK equity market.
4. Factor and sector allocation:
   • In this uncertain environment, our equity positioning remains defensive, favouring low-volatility and quality factors over cyclical or growth exposures.
5. Government bonds:
   • Our government bond strategy is constructive, but limited to core Europe, where we are long duration, supported by falling inflation and expectations of additional ECB easing. Despite volatility in sovereign spreads, European yields—especially on the long end—remain attractive and provide valuable diversification in multi-asset portfolios.
6. Credit:
   • We hold a neutral stance on Investment Grade credit, recognizing the strength of corporate fundamentals but acknowledging that a broader “risk-off” mood is capping upside.
   • We are negative on the high yield segment as spreads have started to widen and sentiment remains fragile in the face of policy uncertainty.
   • In the ongoing uncertain and risk-off environment, we reduced our exposure to Emerging Markets debt. While real yields are regionally attractive and a weaker USD could help, the combination of slowing global growth and intensifying trade tensions calls for greater caution.
7. Alternatives play a crucial role in portfolio diversification:
   • We continue to see value in alternative assets—notably precious metals such as gold and silver, which remain effective hedges in an environment of heightened volatility and trade uncertainty.
8. In currencies, exchange rates will remain a focal point in trade discussions and broader market dynamics:
   • We have a positive view on the Japanese yen, which we see as a likely beneficiary of increased risk aversion.

Our Positioning

As we look ahead, the global macro landscape remains dominated by uncertainty—driven by a combination of slowing growth, rising inflation, persistent geopolitical tensions, and shifting monetary policy expectations. The US economy, once the anchor of global earnings and market leadership, is now showing clear signs of deceleration. The prospect of a more prolonged trade and currency war, combined with weakening domestic demand, challenges both equity valuations and corporate profitability.
While central banks remain the key stabilizing force, policy effectiveness may be tested if inflation surprises or if confidence erodes further. In this context, we believe monetary support can dampen downside volatility but is unlikely to drive a sustained risk rally in the absence of clearer macro signals and de-escalation in trade tensions. Our cautious stance reflects a desire to protect capital and preserve flexibility. In equities, this translates into a defensive regional and factor bias. In fixed income, we are long duration on core European government bonds which offer portfolio diversification benefits, while our credit exposure is kept selective. Until there is greater visibility on these fronts, we believe a prudent, risk-aware positioning is essential. In short, this is not the time to chase risk but to stand ready to adapt as clarity emerges.