Coffee Break

Last week in a nutshell

• Markets sold off as US President Trump imposed a 10% baseline universal tariff with higher individualised rates on 60 trading partners.
• The US economy added 228K nonfarm payrolls while the unemployment rate rounded up to 4.2% in March. These datapoints will represent the last markers before the change in tariff policy.
• In the euro zone, lower-than-expected 2.2% preliminary inflation data for March showed further disinflation progress.
• Euro zone PMI data for March showed an uptick, led by an improvement in Services, while both Services and Manufacturing business sentiment declined in the US.

Investment convictions

Core scenario

• We now believe that our adverse scenario of policy and sentiment shocks derailing the expansion has become more probable than that the one of a “soft landing”.
• The new tariff policy announced by President Trump, combined with government efficiency measures, is likely to weigh on economic growth, increase inflation, and lead to higher uncertainty in the US economy. This could dampen consumption and prompt companies to be cautious with new investments and hiring plans.
• In Europe, fiscal policy, particularly in Germany, is finally becoming more expansive. We expect the new measures announced by European leaders to only mitigate the negative consequences of the forthcoming trade war with the United States. The ECB remains on track to cut rates further this year.
• China’s response to US tariffs, coupled with persistent deflation and limited stimulus, raises questions regarding the upcoming measures to decisively improve consumer sentiment. The tariffs on China are particularly high, including additional fentanyl-related tariffs, which could further strain the Chinese economy and impact global trade dynamics.

Risks

• The new tariffs announced by President Trump, including a 10% minimum baseline tax on imports and higher "reciprocal tariffs" for countries with trade surpluses with the US, are expected to significantly increase the average tariff rate on US imports. A recession by the end of 2025 looks increasingly likely and inflation is set to be pushed upwards by 2pp.
• The escalation of tariffs is contributing to a more fragile global economic backdrop. Retaliatory actions from trading partners could further amplify downside risks, leading to a potential global trade war. This could negatively impact global economic growth and increase market volatility.
• Rising uncertainty and higher tariffs are likely to dampen consumption and prompt companies to be cautious with new investments and hiring plans.

Cross asset strategy

1. The persistence of a high level of uncertainty, along with the deterioration of our economic scenario—not only in the US but also globally—makes us even more cautious regarding risky assets globally.
2. Within equities:
   • We have further reduced our exposure to US equities. Our concerns about growth are likely to result in further downward revisions to corporate earnings, while US equity valuations remain elevated compared to their historical averages and to other regions.
   • In addition, we also downgrade the euro zone, Emerging Markets and Japan to underweight. While the search for greater international diversification could generate positive flows, ongoing trade tensions and rising external vulnerabilities are likely to drive equity indices lower, pricing a higher risk of recession.
   • Our stance on the UK remains neutral.
3. Within sectors:
   • Our positioning reflects a preference for defensive equity profiles, favouring companies with stable cash flows and lower sensitivity to macroeconomic shocks.
   • In Europe, we remain constructive on the Utilities and Consumer Staples sectors, while we remain cautious on Cyclicals.
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. That said, the current environment is challenging for multi-asset portfolios. Rising inflation expectations are likely to cap any further decline in yields, reducing the effectiveness of sovereign bonds as a hedge against a deterioration in the economic outlook. "Stagflation" represents one of the most adverse scenarios for diversified portfolios, offering few places to hide.
5. On Sovereign bonds:
   • We remain long duration on European sovereign bonds, particularly the Bund, supported by a dovish monetary policy stance.
   • We have a neutral stance on US Treasuries, as growth risks, a trade war, and a patient Fed reinforce their role as a safe-haven asset, for now.
6. On credit:
   • Our view on credit remains cautious.
   • We are neutral on investment grade but maintain an underweight stance on high yield, both in Europe and the US. Spreads have only started to widen and should continue to widen further as weaker corporate fundamentals are priced in.
7. We have a neutral allocation in emerging market debt.
8. 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.
9. 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. However, the tariffs announced on Japan could challenge our constructive stance on the currency.

Our Positioning

US President Trump’s latest tariff announcement was more aggressive than anticipated by markets. This escalation, coupled with the earlier-than-expected retaliation from Beijing, is contributing to a more fragile global economic backdrop. Recession risks are clearly rising. While there may be room for negotiation and potential easing of announced tariffs, additional retaliatory actions from trading partners could further amplify downside risks. As a result, our cross-asset strategy is increasingly cautious. We have further reduced exposure to equities globally, downgrading the US, the euro zone, the Emerging Markets, and Japan to underweight, while maintaining a neutral stance on the UK. In fixed income, we remain constructive on sovereign duration, particularly European government bonds, while holding a neutral stance on US Treasuries. Our credit positioning remains cautious, with a neutral view on investment grade and an underweight stance on high yield. We continue to see value in alternative assets, particularly gold, and market-neutral strategies as hedges against volatility. In currencies, we are monitoring closely our positive view on the Japanese yen amid new trade tensions.