Coffee Break

Last week in a nutshell

• Inflation remained in focus, with firmer prints in France, Spain, Japan and Australia reinforcing expectations for further ECB, BOJ and RBA tightening, while US core PCE remained well above what was once the Fed’s 2% target.
• Activity data remained resilient, as US durable goods surprised positively and Germany’s Ifo business climate improved further in August.
• On the central bank front, the bias stayed hawkish, with Jackson Hole keeping the Fed debate centre stage, while the Bank of Korea hiked again, and ECB officials stressed persistent inflation risks.
• Geopolitical noise continued to shape commodity prices, with Hormuz tensions keeping the Brent near $88/bbl, copper pushing towards record highs and precious metals recovering further.
• On the earnings front, Nvidia delivered another strong quarter, beating revenue expectations as data-centre growth remained exceptionally strong.

Investment convictions

Core scenario

• Slight Overweight Equities: We remain constructive for global equities.
• Macro conditions set to improve, but fragile. Macro conditions are supportive in the US and could further improve in the rest of the world if energy prices decline. US growth continued to rest on private domestic demand, with investment – especially AI-related capex – playing a large role. However, ongoing tensions in Iran pose a risk to our scenario.
• An activist US Treasury policy. Beyond the immediate market reaction, the move adds to unease around an increasingly activist Treasury and, more broadly, the US policy mix.
• Global monetary policy divergence. The Fed remains on hold while the ECB is managing inflation expectations, signalling potential ongoing rate hikes. Finally, the Bank of Japan remains in tightening mode even though it takes a gradual approach.

Risks

• Geopolitical fragmentation. The US–China rivalry remains entrenched, while energy supply and global trade patterns continue to shift.
• 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.
• Fed dilemma. A strong economy and a divided FOMC could delay easing. Kevin Warsh will have to build a new policy consensus.
• Fiscal credibility. Rising issuance and political noise could test bond market confidence and 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. This stance reflects our neutral stance on the US Technology sector as Tech-sensitive exposures carry roughly half of the weight in the broad US market.
  • 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. Fiscal spending in Germany 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 though volatile factor. Valuation is attractive as the relative 12m forward PE of the MSCI Emerging Markets index reveals a significant discount to the MSCI World index.
• 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 EU and US mid-caps and some industrial stocks as they are shielded thanks to expansionary budgets and planned deregulation.
• 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 enjoy both fiscal and central bank credibility.
• 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 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. 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 as the precious metal rebounded strongly from the important 4,000 USD/oz support since the start of the month.
  • 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 and NOK.
  • We remain slightly underweight on the USD and are long JPY.

Our Positioning

US data kept markets focused on the tension between resilient activity and persistent inflation while Nvidia again beat expectations, confirming strong AI demand but also elevated market concentration. Geopolitical risks remain firmly on the radar (Hormuz, Iran and renewed tensions around Ukraine), while US-Canada tariff tensions kept trade risks elevated. Our positioning remains constructive as global activity remains resilient, with a slight overweight in equities through Emerging Markets and Japan. Overall, the macro backdrop remains supportive allowing market leadership to broaden. In fixed income, 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 Japanese yen as a hedge, which remains historically extremely undervalued compared to the USD, selected emerging-market currencies and keep commodity-linked currencies such as AUD and NOK. 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.