Coffee Break

Last week in a nutshell

• Euro zone Flash PMIs dropped below the neutral level of 50 in November with both manufacturing and services signalling contraction.
• Following the November Flash PMIs, transatlantic US monetary policy expectations continued on diverging paths: higher expected inflation in the US, and a necessity to cut and support growth in Europe
• Donald Trump's new administration brought a focus on trade policies and uncertainty on tariffs, which, would adversely impact growth in the rest of the world.
• Shares of Nvidia declined following its earnings report. The chipmaker exceeded expectations but forecasts disappointed optimistic estimates.
• At the G20 Leaders' Summit, Ukraine's allies and Russia traded blame for the war, while Brazilian President Lula called for reviving UN climate talks.

Investment convictions

Core scenario

• Investors’ focus is turning from politics to policy: taken together, the four policy areas president-elect Donald Trump is expected to operate significant changes in – tariffs, taxes, immigration and deregulation – appear overall reflationary for the US, bringing stronger growth and higher inflation next year.
• Facing low expectations, activity releases from China have also surprised to the upside and shifted into higher gear in recent weeks while European data weakened again recently. Donald Trump’s agenda could weigh on growth for the rest of the world but without dramatically changing the disinflationary path.

Risks

• Severe US immigration restrictions and massive tariff increases by the US could intensify inflation, and a tight labour market might force the Fed to increase its funds rate as soon as next year. As a result, the growth/inflation mix would deteriorate markedly.
• Such policies, notably trade uncertainty, would have a ripple effect on global markets.
• Geopolitical risks continue to pose a threat to global growth and energy prices, particularly with ongoing tensions in the Middle East and the war in Ukraine.

Cross asset strategy

1. Our outlook is largely guided by the two main market drivers: growth and inflation.
2. We anticipate outperformance from the US economy, driven by robust growth, no apparent disequilibrium, and reflationary policies and have an overweight equity allocation, which includes the broad market, financials, industrials and small-cap stocks – segments that would benefit from stronger GDP growth due to domestically-targeted stimulus policies. We are also long US dollar. Markets have re-adjusted Fed rate cut expectations following the US election, which represents a tailwind for the greenback.
3. Regarding our regional strategy:
   • We have further downgraded EMU equities, and have a negative view. The region is already weak and appears most vulnerable to the announced policies of the future US administration. We also downgraded UK equities where we switched towards a neutral view.
   • We have a positive view on emerging markets although the US election poses a challenge through currency impacts and trade tensions but our position comes with an option on China. We await greater clarity from the Chinese authorities and potential new support measures as a response to new US tariff initiatives.
   • We remain neutral on Japanese equities.
4. Concerning the equity sector allocation:
   • We have an exposure to cyclical themes in the US, including Small and mid-caps, Financials and Industrials.
   • Conversely, we reduced our allocation to defensive sectors, such as Healthcare and Consumer Staples.
5. In the fixed income allocation:
   • Contrary to equities in the region, European assets could shine in the fixed income segment. In our view, core European government bonds are an attractive investment following the weak news flow and the recent uptick in yields as they offer carry and a hedge in a multi-asset portfolio as correlations have shifted during the year. We maintain a long-duration bias via Germany, focusing on quality issuers.
   • We have downgraded the outlook on US sovereign debt and are negative on US duration.
   • Also, we see little room for credit spreads to tighten further.
   • We are neutral on investment grade and high-yield bonds, regardless of the issuers’ region.
   • We have a small exposure to emerging markets' sovereign bonds amid very narrow spreads.
6. We keep an allocation to Alternative investments and to gold.

Our Positioning

Our current portfolio holdings reflect a preference for US equities, especially cyclical themes, while retaining some flexibility in emerging markets. We remain attentive to changes in trade policy and inflation, which will guide our continuous adjustments.
In the US, we further upgraded our positive view. We are tactically positive on China and the broader Emerging markets region, provided effective stimulus measures though. We are most prudent on the euro zone, where the news flow is deteriorating. We are neutral UK and Japanese equity markets. In the fixed income allocation, we continue to prefer core European bonds such as Germany’s for carry. We are negative on US duration. We are neutral on investment grade and high-yield bonds, regardless of the issuers’ region.