Last week in a nutshell
- Israel struck Iranian nuclear and military sites while Tehran vowed a “harsh response.” Oil prices surged due to fears of a wider, protracted conflict.
- US overall benign inflation data in May pointed also to early signs of tariff pressure, reinforcing the Fed’s cautious stance.
- China’s weak trade and inflation figures highlighted soft domestic demand and weighed on commodity prices.
- UK data showed subdued growth and easing wages, supporting a more dovish monetary policy outlook.
- G7 leaders in Alberta pledged trade coordination and support for Ukraine, easing some geopolitical concerns.
What’s next?
- The Fed’s interest rate decision, economic projections, and press conference will guide market expectations on US monetary policy in H2.
- In addition, the Bank of England, the Swiss National Bank and the Bank of Japan will also hold interest-rate setting meetings.
- Euro zone’s flash consumer confidence will provide an early snapshot of household sentiment about the economy, spending intentions, and financial outlook.
- US housing starts and building permits will indicate the health of the housing market and bring some hard data to the debate.
- China’s key data – house prices, industrial output, retail sales, and unemployment – along with US retail sales and industrial production, will offer an activity snapshot for the two biggest economies on the planet.
Investment convictions
Core scenario
- Global growth is trending lower in soft data while inflation is on diverging path in the US, Europe and China. A reality check brought by hard data and escalating tensions between the US and China remain paramount to scrutinise.
- United States: Growth is trending lower and inflation risks remain as tariffs loom large, making the US dollar, hard data releases, and corporate profit growth key to watch in the weeks ahead.
- Europe: With growth holding up and inflation under control – mission accomplished for the ECB – attention now turns to fiscal policies aimed at mitigating broader risks.
- China: Growth remains constrained with little sign of acceleration and deflation persists, amid ongoing pressure from its trade confrontation with the US.
Risks
- Geopolitical fragility: Tensions in the Middle East and US-China relations remain volatile, with potential to disrupt supply chains, energy markets, and investor sentiment.
- US policy uncertainty: Erratic trade and fiscal policies under the Trump administration are undermining confidence in US leadership and the US dollar.
- Inflation via trade and wages: Tariff-induced price pressures and wage growth could stall the disinflation process, forcing the Fed to delay easing. The disconnect between market pricing and policy could trigger repricing across assets.
- Earnings growth: Earnings expectations, especially in the US, appear optimistic and concentrated among Tech megacaps. Broader profit growth projections are at risk due to weak demand, trade disruptions, and policy uncertainty.
Cross asset strategy
- While trade tensions have eased, geopolitical risks remain high, witness the latest developments in the Middle East. We maintain a flexible, diversified strategy with selective positioning and a focus on visibility.
- Global equities:
- Our positioning is currently Neutral overall, with no particular regional bias due to capped upside without earnings support.
- Regional allocation:
- US equities appear fully valued, with markets pricing in a benign outcome on trade and fiscal policy. This limits upside potential and may increase vulnerability to disappointment.
- Europe and Emerging Markets, while more exposed to trade tensions, could be supported by more attractive valuations and stronger fiscal responses, partially offsetting tariff-related headwinds.
- Factor and sector allocation:
- In this environment, we put an emphasis on well-diversified factors over strong directional bets.
- The strategy is overweight Global Technology due to AI-driven structural growth.
- Our views are positive on German midcaps, European infrastructure and defence, supported by fiscal expansion.
- Government bonds:
- European sovereign bonds continue to benefit from growth concerns, subdued inflation expectations, and the ECB’s supportive stance. In a multi-asset portfolio, they add valuable decorrelation and serve as a defensive anchor in the event of renewed market volatility.
- We are Neutral on US Treasuries, with risks balanced between inflation and growth concerns.
- Credit:
- In credit markets, we maintain a preference for Investment Grade bonds over High Yield ones, and favour European credit over those in the US. Investment Grade remains a resilient asset class with strong fundamentals, particularly in European credit, where US versus European spreads have returned to negative levels.
- High Yield spreads have tightened significantly, offering little risk premium, so we keep a cautious stance with a slight underweight on both US and European high-yield bonds.
- We have an allocation to emerging markets debt, after a slight upgrade to neutral. The asset class benefits from positive real regional yields, potential support from a weaker US dollar, and the potential easing of tariffs.
- Alternatives play a crucial role in portfolio diversification:
- Gold remains overweight as a strategic hedge against geopolitical risks and real rate volatility. Demand is supported by central bank buying and retail inflows.
- We maintain an allocation to alternatives to provide stability and diversification amid ongoing volatility.
- In currencies, exchange rates will remain a focal point in trade discussions and broader market dynamics.
- We are overweight defensive currencies (e.g., Japanese yen) and expect USD weakness as growth softens.
Our Positioning
With stock markets trading near the top of their recent range, we remain comfortable with a neutral positioning, maintaining a patient, diversified, and transition-focused investment approach. In equities, we avoid regional biases, emphasizing sector and factor diversification – particularly in areas with strong earnings momentum like Technology and sectors benefiting from fiscal support such as European infrastructure and defence. In fixed income, we prefer Investment Grade bonds over High Yield ones, with a tilt toward European credit due to its resilience and strong fundamentals. We stay neutral on US Treasuries and cautious on High Yield given tight spreads and limited risk premiums. Our view on emerging market debt has improved slightly, supported by positive real yields, a weaker US dollar, and easing tariffs. Alternatives remain a key portfolio stabilizer, with gold retained as a strategic hedge amid ongoing asymmetric risks and geopolitical uncertainties.