Coffee Break

Last week in a nutshell

• After more than one week of US and Israeli strikes, Iranian retaliation has spread across the region, paralysing shipping lanes and air traffic.
• With traffic through the Strait of Hormuz largely halted, energy markets have been sharply disrupted: oil and gas prices surged, triggering repricing across bond and equity markets
• In the US, February’s job report undershot expectations, with non-farm payrolls falling by 92k and the unemployment rate rising to 4.4%, partly affected by a nurse strike and severe winter storms
• The global composite PMI rose to 53.3 in February from 52.6, marking its highest level since May 2024.
• In China, the main message from the “Two Sessions” was clear: Policymakers are prepared to tolerate slower growth to contain macro imbalances, while maintaining technological innovation as a strategic priority.

Investment convictions

Core scenario

• Staying constructive, but cautious: We maintain our equity overweight while closely monitoring the situation in the Middle East. History shows geopolitical pullbacks are short-lived unless they become a sustained macro shock.
• Supportive macro context ahead of the start of the Iran war. Macro conditions remain supportive but are no longer the dominant driver of market leadership. US growth continues to rest on private domestic demand, with investment -especially AI related capex – playing a larger role than consumption.
• Monetary policy ambiguity. The Federal Reserve easing now seems conditional on the evolution of energy prices. Until now, the ECB was “in a good place”, retaining flexibility to act. Finally, the Bank of Japan and the Reserve Bank of Australia remain in tightening mode.

Risks

• Geopolitical fragmentation. The US–China rivalry remains entrenched, while energy supply and global trade patterns continue to shift.
• US’s willingness to demonstrate its military prowess. After removing Maduro from power in Venezuela, a new coordinated attack with Israel against Iran has started. Key variables for global growth will be the length of the conflict and the impact on production and transport of gas and oil through the strait of Hormuz.
• Fed dilemma. A divided FOMC could delay further easing, risking a pause in liquidity support. There is a risk that tariff-related price gains together with 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 hold a constructive stance on global equities over the medium-term, but remain vigilant in the short term:
  • Our overall positioning remains Overweight, led by a positive view on developed markets.
• Regional allocation:
  • United States: Slight Overweight. Tech and AI leadership.
  • Japan: Slight Overweight. Reform, a weak JPY and fiscal spending after snap elections act as a support.
  • Europe: Slight Overweight. Some resilience to tariff news and support from Germany’s expansionary budget, which, is now being put into action.
  • Emerging Markets: Downgrade to Neutral. The region was one of the best performers year-to-date, but in the new geopolitical environment it is also the most vulnerable to higher oil prices and a rising USD.
• Factor and sector allocation:
  • We remain constructive for both Healthcare and Tech. Within the software sector, a large dispersion of business models exists, some of which are more impacted by Artificial General Intelligence than others. The whole sector has sold off indiscriminately, creating opportunities.
  • We keep exposure to European Industrials as well as German and US small- and mid-caps as they are benefitting from expansionary budgets, lower financing costs and planned deregulation.
• Government bonds:
  • We are slightly long core European duration but have recently reduced the overall duration exposure. A spiking oil price, if it remains at elevated levels, will feed through in inflation and interest rate expectations for the ECB.
  • US Treasuries remain Neutral, with the upcoming Fed reshape adding complexity.
• Credit:
  • Positive on European Investment Grade credit versus US Investment Grade credit and High Yield.
  • Emerging Market debt is an Overweight on attractive yields, better trade visibility, and high real interest rates.
• Alternatives:
  • Despite a marked increase in volatility, Gold remains a key conviction as a hedge against geopolitical risks and real rate volatility; supported by strong central bank buying and investor flows.
  • We retain allocations to alternative 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.
  • We remain underweight on the USD but have reduced this underweight materially on renewed geopolitical escalation.
  • We are also long JPY and hold selective long positions in EM currencies with strong fundamentals.

Our Positioning

Coordinated US and Israeli strikes against Iran began on Saturday February 28th, while Iranian retaliation has spread across the region. Without any clearly stated intentions or objectives on the part of the United States of America, these events give rise to numerous hypotheses and uncertainties for the region in the coming months, as well as risks for investors. In the short term, volatility rose, risky assets sold off and increased inflation expectations also caused rates to rise as oil rose sharply. A weak US job report adds to the complexity. We hold a constructive stance on global equities over the medium-term but remain vigilant in the short term. Our overall positioning remains Overweight, led by a positive view on developed markets. We downgrade Emerging markets to neutral: The region was one of the best performers year-to-date, but in the new geopolitical environment it is also the most vulnerable to higher oil prices and a rising USD. Our key themes include electrification bottlenecks – supportive of some utilities, infrastructure, and metals – alongside healthcare and biotech for idiosyncratic growth. In fixed income, duration serves as portfolio insurance amid divergent rate paths, while selective European credit and EM debt offer attractive carry. We anticipate a softer US dollar and remain constructive on metals.