Coffee Break

Last week in a nutshell

• After increasingly inflammatory rhetoric over the weekend, a fragile ceasefire is in place but the global situation in the Middle East remains frail.
• ISM data in the US edged down but still remains in growth territory. New orders were strong and point to a resilient US economy, but prices were up. PCE from February was still above the Fed’s target, and that was before the energy shock. CPI data from March confirmed an upward spike in prices due to rising energy prices.
• German industrial production disappointed over the month, pointing towards a reduction in growth.
• US GDP in the 4^th quarter slowed down a bit more than expected.

Investment convictions

Core scenario

• Tactical neutrality: With negotiations ongoing and a ceasefire in place, there’s room for markets to relax. In this scenario, we prefer to tactically remain close to a neutral positioning on equities.
• · Monitoring the situation in the Middle East closely. We remain ready to re-engage with risky assets should the Strait of Hormuz reopen, oil stabilise toward $80-85/barrel, and rate pressures ease. History shows geopolitical pullbacks are short-lived unless they become a sustained macro shock.
• · Ahead of the start of the Iran war, a supportive macro context. Macro conditions remained supportive until early-March but are no longer the dominant driver of market leadership. US growth continued to rest on
• private domestic demand, with investment – especially AI-related capex – playing a larger role than consumption.
• Monetary policy ambiguity. A Federal Reserve easing now seems conditional on the evolution of energy prices – we think the Federal Reserve is likely to look through the shock. The ECB will have to manage inflation expectations and is no longer “in a good place”; the ECB may adopt a more cautious stance, delivering a first 25 basis point hike in the coming months as an insurance policy move. Finally, the Bank of Japan and the Reserve Bank of Australia remain in tightening mode.

Risks

• Iran war. The duration of the war and the effective closure of the Strait of Hormuz, the diffusion towards other countries and beyond energy commodities to soft commodity prices, and the damage to the energy infrastructure in the region represent the key risks for the growth / inflation
• Geopolitical fragmentation. The US–China rivalry remains entrenched, while energy supply and global trade patterns continue to shift.
• Fed dilemma. The oil shock and a divided FOMC could delay further easing, risking a pause in liquidity support. There is a risk that tariff-related price gains together with energy price related pressure, could lead to some inflation increases over the coming months.
• Fiscal credibility. Rising issuance and political noise could test bond market confidence and trigger volatility in yields.

Cross asset strategy

• We are tactically neutral on equities while the ceasefire persists and negotiations are ongoing.
  • Our overall positioning is Neutral
• Regional allocation:
  • United States: Neutral. The United States remain relatively more insulated thanks to domestic energy production and still-resilient private demand.
  • Japan: Neutral. Structural energy import dependence, but strong fundamentals and a supportive government policy
  • Europe: Neutral. Acute exposure to Middle Eastern oil and LNG dynamics and vulnerability to renewed headline inflation. On the other hand, fiscal spending is kicking into full gear.
  • Emerging Markets: Neutral. The region was one of the best performers year-to-date until early-March, but in the new geopolitical environment it is also the most vulnerable to higher oil prices and a rising USD. In case of a negotiated peace agreement, this sentiment could quickly reverse.
• Factor and sector allocation:
  • We remain constructive for both Healthcare and Tech. Within the software sector, a large dispersion of business models exists, some of which are more impacted by Artificial Intelligence than others.
  • We keep some exposure to US mid-caps as they are somewhat shielded from expansionary budgets and planned deregulation.
• Government bonds:
  • We are neutral on core European duration. A spiking oil price, if it remains at elevated levels, is already feeding through in interest rate expectations for the ECB.
  • US Treasuries remain Neutral, with the upcoming Fed reshape adding complexity.
• Credit:
  • Spread widening in European Investment Grade has been 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. With dispersion increasing, 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 European High Yield and negative on US High Yield.
  • Emerging Market debt is now neutral. Emerging markets face a challenging backdrop of higher yields, a stronger dollar, and rising volatility, leading to a neutral stance on both Emerging Market local debt and corporates.
• Alternatives:
  • We remain constructive on gold over the long term, but tactically it is not working as a hedge in the current environment. We also note the increased volatility.
  • 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, NOK and BRL.
  • We remain underweight on the USD but have reduced this underweight materially on renewed geopolitical escalation.
  • We are also long JPY.

Our Positioning

From escalation to a quick but fragile deescalation: A ceasefire is now in place, with negotiations ongoing. The situation remains fragile however, and fighting could quickly continue. We are currently tactically neutral on equities. The current ceasefire is a great first step, allowing markets to catch a breather. We remain prepared to act quickly in either scenario: Further deescalation, or a resumption of the conflict. In giving peace a chance, we prefer to be neutral since the outcome of the negotiations is de facto binary. In fixed income, we are neutral on core European duration and on global bonds in general. Finally, we are neutral on Emerging market debt, for both hard and local currency.