Coffee Break

Last week in a nutshell

• Investors were inspired by fast approaching IPO’s of SpaceX, OpenAI and in a later stage Anthropic.
• Nvidia delivered another strong earnings beat and were upbeat on guidance, increasing their dividend 25-fold, inspiring a rally in semiconductor stocks.
• US corporate exceptionalism was demonstrated by activity data surprises on the upside, notably on flash PMIs, which disappointed in other regions.
• On the other hand, University of Michigan consumer sentiment showed a marked decline, indicating that higher inflation is impacting US households.
• Last week saw the largest-ever drawdown in US oil inventories since records began in 1982 as commercial inventories and the SPR combined fell by 17.8mb.

Investment convictions

Core scenario

• Slight overweight Equities: With negotiations ongoing and a ceasefire in place and lengthened, there’s room for markets to relax while the ongoing closure of the Strait is lifting producer and consumer prices.
• Monitoring the situation in the Middle East closely. We are ready to adjust our positioning further as medium-term oil prices and bond yield pressures evolve.
• Since the start of the Iran war, no macro fallout in the US. Macro conditions remain supportive in the US and are no longer the dominant driver of market leadership. US growth continued to rest on private domestic demand, with investment – especially AI-related capex – playing a larger role than consumption.
• Back to fundamentals. Markets have shifted attention back to corporate profit growth as the Q1 earnings season is on a solid footing thanks to upgraded earnings expectations, led by Technology, Energy and Basic Materials.
• Monetary policy ambiguity. A Federal Reserve easing under its new Chair Kevin Warsh seems conditional on the evolution of energy prices – we think the Federal Reserve is likely to look through the shock. The ECB will have to manage inflation expectations. At its latest meeting, the central bank opted to hold interest rates steady at 2%, signalling a potential imminent rate hike this summer. Finally, the Bank of Japan and the Reserve Bank of Australia remain in tightening mode.

Risks

• Iran war. The duration of the war and the effective closure of the Strait of Hormuz, the diffusion towards other countries and beyond energy commodities to soft commodity prices, and the damage to the energy infrastructure in the region represent the key risks for the growth / inflation mix, notably for energy-importing countries.
• Geopolitical fragmentation. The US–China rivalry remains entrenched, while energy supply and global trade patterns continue to shift. US President Trump’s visit to China did not produce any meaningful positive surprise.
• Fed dilemma. The oil shock and a divided FOMC could delay further easing, risking a pause in liquidity support. There is a risk that energy price related pressure, could lead to some inflation increases over the coming months.
• Fiscal credibility. Rising issuance and political noise could test bond market confidence and trigger volatility in yields.

Cross asset strategy

• We are slightly overweight on equities via regional upgrades of US and EM.
• Regional allocation:
  • Slight overweight United States. The US remain relatively more insulated from the negative impacts of the war in Iran thanks to domestic energy production and still-resilient private demand, fuelled by the AI investment boom. We view the US in a relative better place, with a potential Fed easing, positive pricing power, AI fast adoption, and business de-regulation. Positive EPS growth revisions represent a support for the stock market.
  • Neutral Japan as the country faces structural energy import dependence, but a supportive government policy.
  • Neutral Europe as the region suffers acute exposure to Middle Eastern oil and LNG dynamics and vulnerability to renewed headline inflation. On the other hand, fiscal spending is kicking into full gear.
  • Slight overweight Emerging markets. A selective approach within the region is warranted, but the overall strong exposure to Tech is a supportive factor. We prefer Korea, Taiwan, and China Tech to India. Valuation is attractive as the relative 12m forward PE of the MSCI Emerging Markets index reveals a 33% discount to the MSCI World index.
• Factor and sector allocation:
  • We remain constructive for both Technology and Healthcare. Within the software sector, a large dispersion of business models exists, some of which are more impacted by Artificial Intelligence than others.
  • We keep exposure to EU and US mid-caps and industrial stocks as they are somewhat shielded from expansionary budgets and planned deregulation.
• Government bonds:
  • We upgrade European Bonds duration on Core Europe. The Iran war has led to an inflation-driven repricing, as energy and supply disruptions lift inflation expectations. As a consequence, the ECB easing expectations from the start of the year have been reversed and gone too far in our view. We expect +2 hikes of 25bp each whereas the market is positioned for more than 3 hikes. We focus on high quality, core-European AAA-rated sovereign bonds, which enjoy both fiscal and central bank credibility.
  • US Treasuries remain Neutral, with the upcoming Fed reshape adding complexity.
• Credit:
  • Spread widening in European Investment Grade has been very limited, insufficient to create a broad valuation opportunity while macro uncertainty remains elevated. Investment Grade fundamentals remain solid, but sensitivity to higher rates warrants a neutral positioning. For the moment, we favour maintaining selectivity rather than holding an overweight position.
  • Neutral on Investment Grade credit in both the US and Europe. High Yield technicals are deteriorating amid outflows and increasing supply. Within High Yield we’re neutral on Europe and negative on the US.
  • We upgrade Emerging market debt via Sovereign Local Currency debt as the spread tightening trend is unfolding again and there is some leeway to see further compression ahead. Also, EM FX appears best placed to benefit from renewed potential USD weakness. In addition, the current Yield-to-Maturity of ca. 7% represents an attractive carry for this income-diversifier position.
• Alternatives:
  • We remain constructive on gold over the long term.
  • We hold precious and strategic metals, alternatives and market-neutral strategies for portfolio stability and diversification.
• Currencies:
  • The current market regime favours currencies linked to commodities such as precious metals and oil. Therefore, we have long positions in AUD, NOK and BRL.
  • There is an increased potential of a better relationship with the EU for Hungary which could lead to more stable policies and therefore a meaningful reduction of risk for foreign investors, leading us to hold a position in the Hungarian Forint.
  • We remain underweight on the USD but have reduced this underweight materially on renewed geopolitical escalation.
  • We are also long JPY.

Our Positioning

Global markets remained volatile, with sentiment driven less by individual data releases and more by the broader mix of geopolitical risk, sticky inflation concerns and renewed pressure on bond markets. Equities were generally resilient but uneven. The focus was mainly on Nvidia’s quarterly earnings, which inspired a broad semiconductor and tech rally. Additionally, SpaceX’s long awaited IPO filing was released, adding fuel to the risk on sentiment, especially with other very large IPO’s such as OpenAI and Anthropic in the pipeline for later this year. Rates stayed under pressure as investors reassessed the path for central banks. In the UK, fiscal and political uncertainty continued to weigh on gilts, and commodities remained an important source of volatility, with oil swinging on Middle East supply-risk headlines and gold supported by demand for defensive assets.

We remain dedicated to those sectors with high EPS revisions and a strong demand for their products. Hence, we keep our overweight in Technology, but given the recent rally in semiconductor names, we selectively and partially take profit.