Last week in a nutshell
- Oil prices have risen. Considering the conflagration in the Middle East, the reaction has been relatively muted so far.
- With the addition of 254K nonfarm payrolls, the US labour market proved once again to be particularly resilient.
- The USD rose as Fed Chair Powell downplayed big rate cuts, while the EUR weakened on lower euro zone inflation and ECB rate cut speculation.
- The EU voted to impose permanent tariffs on China-made electric vehicles (BEVs), amid internal opposition and trade war risks.
What’s next?
- China is due to release a series of data covering inflation, vehicle sales, balance of trade with imports and exports, as expectations of a recovery in consumer confidence are rising.
- Preliminary readings of the Michigan Sentiment data will show how well the consumer is faring and assessing current conditions and inflation expectations.
- The Federal Reserve will publish the minutes of its last FOMC, a key tool for interpreting the Fed’s thinking and future actions, as investors estimate the size and rhythm of additional cuts.
- In Japan, the Cabinet Office is set to release the preliminary Coincident and Leading Economic Index, providing a comprehensive overview of the economy, including labour conditions, consumer sentiment, factory output, and retail sales.
Investment convictions
Core scenario
- We remain confident in a soft landing of the US economy. Major central banks have begun their easing process, and we are now in a synchronised easing cycle. This marks the start of a normalisation in the yield curve, after more than two years of inversion.
- China unveiled a rare, simultaneous, and relatively large cut in policy rates and the Reserve Requirement Ratio, along with guidance on further policy easing. Beijing’s strong language and the Party’s backing of additional fiscal stimulus measures, likely to follow soon, are encouraging signs.
- European growth continues to disappoint and is paramount to a pick-up in business and consumer activity.
Risks
- Geopolitical risks continue to pose a threat to global growth, particularly with escalating tensions in the Middle East.
- The US presidential campaign has been turbulent, and the aftermath could be equally disruptive: a shift in leadership may lead to higher tariffs or taxes.
- Beyond US equities, such policies would have a ripple effect on global markets.
Cross asset strategy
- In light of improving fundamentals and easing financial conditions, supporting activity and markets, we are more positive on equities, i.e. overweight, but with a hedge that takes into account geopolitical tensions.
- We increased the allocation to reflect the latest developments in China and the US.
- In the U.S., the prospect of Fed rate cuts has already helped to ease financial conditions, thereby supporting activity and markets. We are exposed to the broad market.
- In China, the People’s Bank of China and the government have joined forces to restore confidence. We are tactically positive on Chinese and Emerging Markets equities to benefit from the current momentum.
- In the euro zone, economic growth remains weak. Economic surprises are on a downtrend, unlike in the US and China. Hopes of faster ECB cuts are increasing.
- We are tactically neutral Japan as further yen strengthening and emerging political uncertainties could be a challenge.
- In the equity sector allocation:
- We are positive on the healthcare sector, with earnings improving and performance less dependent on broader economic conditions.
- We are buyers of European Real Estate, which should benefit from lower interest rates.
- We are neutral Small caps & Tech sector.
- In the fixed income allocation, government bonds are an attractive investment as they offer carry and a hedge in a multi-asset portfolio. Also, we see little room for credit spreads to tighten further:
- We favour carry over spreads, with a focus on quality issuers: we maintain our long-duration bias via Germany.
- We are neutral on US duration.
- We have a relatively small exposure to emerging markets' sovereign bonds amid very narrow spreads.
- We are neutral on investment grade and high-yield bonds, regardless of the issuers’ region.
- We keep an allocation to Alternative investments and to gold.
Our Positioning
We recently added short-term protection to our multi-asset strategy, taking into account tensions in the Middle East. We remain constructive – but with caution - on equities. The positioning reflects our confidence in the support provided by the synchronized global easing cycle. We have a preference for the US and a more tactical approach to the Chinese market, which gained momentum.
In our bond strategy, we take into account the correlation between equities and bonds which is reverting. We focus on safe bonds which fulfil their protective role within a diversified portfolio. We maintain a long duration via German bonds. Simultaneously, we remain neutral on corporate investment grade and more cautious on global high yield.