Coffee Break

Last week in a nutshell

• Global trade uncertainty rose further as the long promised April 2 “Liberation day” started early with the announcement of an additional 25% US tariff on automobiles and parts that will layer on top of existing tariffs.
• Higher-than-expected-inflation continues to be the narrative for the Fed as the US Core PCE increased by 0.4%, pushing the annual rate to 2.8%.
• Growth concerns persist as consumer confidence and consumer sentiment hit fresh lows, raising doubts about the sustainability of this cycle.
• France and Spain reported inflation rates below forecasts for March, at a stable 0.9% and a weakening 2.2% respectively, suggesting further easing of inflationary pressures in the euro zone.
• The potential negative impacts from increased tariffs were taken into consideration in the BoJ decision to keep rates steady, in the Bank of Canada’s minutes and by Banxico’s to cut rates.
• Strong corporate earnings reflected sector-specific trends, with BYD benefiting from competitive pricing and strong EV sales, while Micron Technology continuing to invest heavily in growth, maintaining solid cash reserves.

Investment convictions

Core scenario

• US growth has become suddenly at risk as trade policy uncertainty (TPU) and DOGE policy uncertainty (DPU) weigh on confidence, while tariffs and “efficiency” measures dampen economic momentum.
• In Europe, fiscal policy, particularly in Germany, is finally becoming more expansive, but with slowing wages, easing inflation, and looming US tariffs, the ECB remains on track to cut rates further this year.
• China’s muted response to US tariffs, coupled with persistent deflation and limited stimulus, raises questions regarding the upcoming measures to decisively improve consumer sentiment.

Risks

• Monetary policy expectations continue to diverge: The Fed remains cautious amid “stagflation” and “Trumpcession” fears in the US, while European fiscal spending could jeopardise hopes for massive ECB easing, creating uncertainty in rate paths.
• The economic and trade policy uncertainty is weaving its way through the globe: Elevated policy uncertainty across G7 nations, particularly in North America, continues to weigh on business confidence and market stability.
• Escalating US tariffs keep making the headlines. With tariffs still in the early stages and major announcements scheduled for April 2, the risk of further trade disruptions and retaliatory measures remains a key threat to global supply chains and financial markets.

Cross asset strategy

1. Over the past weeks, economic uncertainties have intensified in the US while European fiscal policies have emerged as a beacon of hope. In a perceived “risk-off” environment, we maintain a balanced equity strategy that reallocated away from the US and diversifies across global equities. The rising risk premium is also driving a shift towards sovereign bonds. Supported by lower than expected inflation in the euro zone and an accommodative ECB, we remain positive on European duration including the Bund.
2. Within equities:
   • We have an underweight stance on US equities as rising growth risks and policy uncertainty challenge the sustainability of “US exceptionalism”. Trade tensions, fiscal concerns, and monetary policy constraints are weighing on corporate earnings expectations, while stretched valuations leave little margin for error.
   • In contrast, European equities are benefitting from a shift toward fiscal stimulus, and select emerging markets offer attractive opportunities. Nevertheless, trade war risk loom and temper the perspective. We are neutral European and Emerging markets equities. Within Emerging markets, we are neutral China whose recent outperformance relative to global markets is likely to moderate. The bulk of stimulus announcements are behind us and earnings season is largely over.
   • The stance on Japan is neutral.
3. Within sectors:
   • We remain selective, tilting toward defensive sectors with stable earnings profiles while reducing exposure to areas more sensitive to economic slowdown risks, a move that aligns with a late-cycle environment where defensive positioning becomes key.
   • In Europe, fiscal spending creates a more favourable environment for long-term investors, mainly through industrial and mid-cap stocks.
   • In the US, we have reduced our exposure to US Financials as growth concerns, policy uncertainty, and a cautious Fed weigh on the sector’s earnings outlook. Slower loan growth and tighter credit conditions could further pressure profitability.
   • In both the US and Europe, we look for companies with defensive characteristics which tend to outperform in periods of slowing growth and heightened volatility.
4. In fixed income, there is growing appeal for safer assets. We maintain a constructive stance on sovereign duration, as slowing growth and policy uncertainty support demand for high-quality bonds.
5. On Sovereign bonds.
   • European sovereign bonds remain supported by an accommodative ECB and fiscal stimulus efforts. We are positive on the Bund.
   • We have a neutral stance on US Treasuries, as growth risks, trade tensions, and a patient Fed reinforce their role as a safe-haven asset. With monetary policy remaining reactive and inflation pressures subdued, yields have room to decline further.
6. On credit:
   • We remain neutral on Investment Grade.
   • The underweight positioning in European and US high-yield bonds illustrates our more cautious stance, as investors reduce exposure to credit risk. Rising economic uncertainty and slowing growth increase credit risk. While spreads remain relatively tight, weaker corporate fundamentals, potential earnings pressures, and policy uncertainty—particularly in the US—make the risk-reward less attractive.
7. We have a neutral allocation in emerging market debt: A weakening US dollar and 10-year yields are headwinds.
8. Alternatives play a crucial role in portfolio diversification:
   • Precious metals like silver and gold remain attractive as hedges against inflation and economic uncertainty.
9. In currencies, exchange rates will remain a focal point in trade discussions and broader market dynamics:
   • The Japanese yen may appreciate further in response to higher rates in the region and its safe-haven status.

Our Positioning

We maintain a balanced equity strategy, reducing US exposure due to rising growth risks, policy uncertainty, and stretched valuations while remaining neutral on European and Emerging Markets equities, which benefit from fiscal stimulus but face trade war risks. Within sectors, the focus is on defensive stocks with stable earnings. In addition, we focus on Europe’s industrial and mid-cap space. Regarding fixed income, European sovereign bonds remain attractive due to ECB support, while US Treasuries are held neutral as a safe-haven asset. A cautious stance on credit is reflected in an underweight position in high-yield bonds due to increasing credit risk. Alternative assets, particularly gold and silver, play a key role in hedging against inflation and uncertainty, while currency dynamics remain a focal point, with potential appreciation in the Japanese yen.