Coffee Break

Last week in a nutshell

• US 10Y Treasury yields reached 5.20% as real yields rose, tightening financing conditions while the yield curve flattened.
• Resilient business surveys and AI investment supported growth expectations, with the OECD upgrading its forecasts.
• Persistent energy pressures sustained the tightening bias, with Norges Bank raising rates and the Riksbank signalling potential hikes ahead.
• Talks on reopening the Strait of Hormuz and a two-month extension of the US–China trade truce offered some relief without resolving underlying geopolitical risks.

Investment convictions

Core scenario

• Slight overweight Equities. We remain constructive for global equities.
• Macro conditions are robust. They are supportive and could further improve if energy prices decline. However, ongoing tensions in Iran and expensive energy prices pose a risk to our scenario.
• Upcoming earnings season. Strong business surveys suggest the expansion remains intact and earnings revisions remain positive in developed markets.
• Monetary policies start to align. The Fed restored some credibility, joining the ECB and BoJ in monetary tightening mode.

Risks

• Geopolitical fragmentation. The US–China rivalry remains entrenched, while energy supply and global trade patterns continue to shift. Little tangible progress had been made during the US-China summit.
• Ongoing tensions in Iran. A resolution is paramount for our core scenario to hold. In the meantime, the situation in Iran remains very fragile and volatile.
• Fiscal credibility. Rising issuance and political noise are testing bond market confidence and have started to trigger volatility in yields.

Cross asset strategy

• We are slight overweight on equities via regional preferences of Emerging markets and Japan, while holding a neutral stance on the US and Europe.
• Regional allocation:
  • Neutral United States. Resilient growth is supporting equity markets, but higher borrowing costs are testing that resilience.
  • Slight overweight Japan. Supportive government initiatives and a relatively prudent BoJ provide a favourable backdrop for risky assets. Also, its world-leading franchises in robotics, factory automation and industrial equipment should position the market to benefit from the next phase of AI-driven productivity growth.
  • Neutral Europe. The region could benefit from easing energy prices if tensions in the Middle East decline, but sector composition appears less exposed to dominant market themes.
  • Slight overweight Emerging markets. A selective approach within the region is warranted, but the overall strong exposure to Tech is a supportive though volatile factor. Valuation is attractive, revealing a significant discount to developed markets.
• Factor and sector allocation:
  • We favour themes that benefit from long-term investment cycles.
  • We remain constructive on the Healthcare sector and keep exposure to some industrial stocks as they benefit from expansionary budgets.
• Government bonds:
  • We are long Core European Bonds duration. The Iran war has led to an inflation-driven repricing. As a consequence, ECB central bank expectations have been cemented into rate hikes. We focus on high quality, core-European AAA-rated sovereign bonds, which still enjoy both fiscal and central bank credibility.
• Credit:
  • Spreads in European Investment Grade remain 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 are positive on 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. In addition, the current Yield-to-Maturity above 7% represents an attractive carry for this income-diversifier position.
• Alternatives:
  • We remain constructive on gold as the precious metal rebounded strongly from the important 4,000 USD/oz support.
  • 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. Therefore, we have long positions in AUD.
  • We remain long JPY.

Our Positioning

Earnings resilience supports continued equity participation, with greater selectivity given the rise in interest rates and bond yields. We therefore closed our midcap exposure on both sides of the Atlantic to reduce sensitivity to tighter financing conditions. Upcoming US labour data, euro zone inflation and Australia’s policy decision will test whether markets have priced enough tightening - or moved too far. Our positioning remains constructive as global activity remains robust, with a slight overweight in equities through Emerging Markets and Japan. In fixed income, we acknowledge the sharp adjustment as 10Y US Treasury yields reached 5.20%, largely driven by higher real yields, increasing financing costs. Rising rates and a flattening yield curve create a more demanding environment. We favour Emerging Market debt and are constructive on high quality, core European duration. Within credit, we prefer European Investment Grade over High Yield, where risk premia remain limited. We maintain a preference for the JPY as a hedge, which remains historically extremely undervalued, selected emerging-market currencies and keep commodity-linked currencies such as AUD. Finally, gold, strategic metals and alternative strategies continue to play an important diversification role in a world of supply constraints, policy divergence and real-rate volatility.