Coffee Break

Last week in a nutshell

• AI earnings tested market leadership, as disappointing results and growing scrutiny of AI investment returns triggered a broader tech sell-off.
• Middle East risks intensified again, with tanker attacks and Houthi strikes pushing Brent above USD117/bbl and reviving the inflation-growth shock across rates, equities and EM.
• Central banks paused without closing the door to further tightening, as the Fed, ECB and BoJ all held rates while keeping a hawkish bias; elevated euro-area inflation also kept December live.
• Growth stayed resilient but uneven on both sides of the Atlantic, with US Q3 GDP expanding 3.4% annualised while euro-area GDP beat expectations, despite contraction in France and stagnation in Italy.
• Brazil repriced sharply after Lula’s re-election, reversing positioning built around a Bolsonaro victory and bringing fiscal credibility back to the centre of BRL and local-rates pricing.

Investment convictions

Core scenario

• Early November forms a dense catalyst corridor, with central-bank decisions, mega-cap earnings, political votes, fiscal tests and geopolitical summits arriving in quick succession.
• Slight overweight Equities. US equities are slightly overweight, alongside maintained preferences for Japan and emerging markets.
• Macro conditions are robust, witness US Q3 GDP numbers. US investment and consumption sustain expansion, while Europe’s recovery remains more dependent on public spending in Germany. Lower energy prices would provide additional support.
• Ongoing Q3 earnings season. We acknowledge that guidance must now validate profit expectations despite higher financing costs.
• Limited additional tightening. Tightening financing conditions give the Fed scope to pause as underlying inflation becomes less concerning.

Risks

• Geopolitical fragmentation. Entrenched US–China rivalry and renewed trade friction could disrupt supply chains, investment and corporate margins.
• Persistent energy pressure. Prolonged disruption linked to Iran could keep energy costs elevated, squeeze demand and require more monetary tightening than expected.
• Fiscal credibility. Heavy issuance and political uncertainty could push yields and sovereign spreads higher, tightening financing conditions without stronger growth.
• Earnings disappointment. Elevated expectations and concentrated leadership leave equities vulnerable to weaker guidance, particularly among technology companies driving profit upgrades.

Cross asset strategy

• We are slight overweight on equities. We are slightly overweight US equities, alongside maintained preferences for Japan and emerging markets.
• Regional allocation:
  • Slight overweight United States. Resilient growth and strong earnings momentum into next year is supporting equity markets.
  • 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. 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 benefitting from expansionary budgets.
• Government bonds:
  • We are long Core European Bonds duration. The Iran war has led to an inflation-driven repricing. Therefore, 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:
  • Despite recent widening, spreads in European Investment Grade remain insufficient to create a broad valuation opportunity while macro uncertainty remains elevated. 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, justifying the recent spread widening. 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, current yields above 7% represent an attractive carry for this income-diversifier position.
• Alternatives:
  • We remain constructive on gold.
  • 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

Central banks and US data kept markets on edge while Brent remained above USD117/bbl and European gas above EUR100/MWh, pushing euro inflation expectations to their highest since 2023. US Q3 GDP expanded 3.4% annualised, while core PCE rose 0.3% month on month and 3.1% year on year, confirming resilient demand but persistent inflation. Equity sentiment, meanwhile, remained selective as weaker results from bellwether names revived doubts around the pace and returns of AI investment. Our positioning remains mildly constructive as global activity remains robust, with a slight overweight in equities through the US, Emerging Markets and Japan. In fixed income, we acknowledge the adjustment in global sovereign bonds. Rising rates 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 despite the recent repricing. 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.