Coffee Break

Last week in a nutshell

• A weaker but still OK US job report looks consistent with our expectation for a 25bp rate cut at the September FOMC meeting
• Veteran French conservative Michel Barnier has assumed the role of prime minister, nearly two months after France's snap elections resulted in a hung parliament.
• Euro zone business activity got a lift from France hosting the Olympics, but weak demand points to sluggishness in the GDP growth rate.
• The Bank of Canada lowered its main interest rate for the third consecutive time by 0.25% to 4.25%, citing concerns about a weakening economy and the risk of inflation slowing too rapidly.

Investment convictions

Core scenario

• Our central forecast continues to predict a soft landing. Domestic demand in the US continues to grow, including consumption. Although business activity indicators are somewhat volatile, they remain in expansionary territory.
• US growth forecasts for 2025 are increasingly influenced by political and monetary factors. EU’s sluggish growth is dependent on a pick-up in business and consumer activity, while China's growth remains subdued.
• The cooling of inflation – and core inflation – is a synchronised global development. Supportive (i.e. lower) inflation news also paves the way for European central banks (e.g., ECB, BoE, SNB, Riksbank) to further cut interest rates in Q3. With several emerging market central banks already cutting since 2023, and the Federal Reserve joining the chorus, the long-awaited global easing cycle is set to gain momentum.

Risks

• Looking ahead, we caution against policy decisions that lead to higher tariffs and a tighter labour market in the US, which could ultimately lead to rising inflation again or significantly higher taxes, which could weigh on growth.
• The upcoming change in the White House and the potential reprioritisation of US economic policy could affect the speed and extent of monetary easing.
• Geopolitical risks to the outlook for global growth remain tilted to the downside as the potential resumption of international trade tariffs, developments in the Middle East and the war in Ukraine weigh on confidence.

Cross asset strategy

1. We acknowledge the recent nervous price action on equity markets, detrimental seasonal factors, and volatility that remains relatively elevated compared to H1 2024 but keep faith in an economic soft landing scenario in the US.
2. We disagree with the market, which prices a Fed policy that cuts rates by as much as 100bp by year-end, implying at least one 50bp rate cut at one of the remaining three FOMC meetings.
3. We hold a long duration via European debt and a neutral equity stance with a relative regional preference for the US.
4. We prefer developed markets vs emerging markets, and besides the US, also invest in UK equities for their defensive characteristics.
   • In the US, we are exposed to the broad market.
   • In the UK, valuations remain attractive with the potential for multiple expansion and the BoE poised to cut interest rates.
   • In the eurozone, conservative veteran Michel Barnier was appointed as France’s prime minister. This might appease political uncertainty in the short term but the government faces first budget hurdles as soon as this Autumn.
   • We are tactically neutral Japan as further yen strengthening and emerging political uncertainties could be a challenge.
   • We are neutral emerging markets, as the Chinese consumer has yet to gain confidence and deflationary pressure persists.
5. In the equity sector allocation:
   • We are positive on the healthcare sector. Recent earnings indicate that the normalisation of overearning from COVID, due to destocking excess inventories and demand for COVID-specific products, is mostly complete.
   • We are neutral Small caps & Tech sector.
6. In the fixed income allocation, government bonds are an attractive investment as they offer 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 and the UK.
   • 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.
7. In the currency allocation, we took profit on our remaining commodity-linked currencies, such as the Australian dollar.
8. We keep an allocation to Alternative investments and to gold.

Our Positioning

Our positioning reflects our belief in the soft landing of the US economy along with caution amid political uncertainty. Within equities, we have a preference for the broad US market and prefer UK equities relative to the euro zone on this side of the Atlantic. In our sector allocation, we are overweight healthcare for its defensive quality, neutral US technology and small caps.
Our bond strategy reflects our H2 2024 Outlook, i.e. as inflation normalises, the correlation between equities and bonds is reverting, thereby enabling safe bonds to resume their protective role within a diversified portfolio. We therefore maintain a long duration via German and UK sovereign bonds. Simultaneously, we remain neutral on corporate investment grade and more cautious on global high yield.