Last week in a nutshell
- China announced significant cuts and easing guidance to boost confidence, with Beijing’s commitment to fiscal stimulus seen as a positive sign.
- US Consumer Confidence fell in August, the steepest drop in three years, with most respondents worried about employment and inflation.
- The US PCE rose 0.1% in August, bringing the 12-month inflation rate to 2.2%, closer to the Fed’s target and potentially easing future rate cuts.
- In Europe, consumers lowered their inflation expectations to a three-year low, while German unemployment and the ifo business sentiment disappointed.
What’s next?
- The US job report will give insight into the health of the US labour market, consumer confidence and spending, both highly linked to employment levels and the trajectory of upcoming Fed cuts.
- Preliminary inflation including the CPI will be published in the euro zone but the main focus has moved to growth, putting back the final global PMI and US ISM in the spotlight.
- Fed Chair Jerome Powell and ECB President Christine Lagarde are both scheduled to speak on their respective economic outlook and policy directions, as investors closely monitor the synchronised easing cycle.
- In the US, VP candidates Vance and Walz will debate as early voting picks up.
Investment convictions
Core scenario
- We remain confident in a soft landing of the US economy despite recent volatility, election jitters, seasonal challenges, and higher market volatility compared to H1 2024.
- Major central banks have begun the easing process and we are in a synchronised easing cycle now. This marks the starting point of a normalisation in the yield curve, after more than two years of inversion.
- China’s growth target being at risk, the country 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, which are 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
- 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.
- Besides the US presidential campaign being one of the most dramatic and chaotic ones, the upcoming change in the White House may bring a reprioritisation of US economic policy, thereby impacting speed and extent of monetary easing.
- Geopolitical risks to the outlook for global growth remain tilted to the downside with the war between Russia and Ukraine, the potential resumption of international trade tariffs, and developments in the Middle East.
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.
- 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. US data, including growth measures and receding jobless claims, continue to point away from a recession. We are exposed to the broad market.
- In China, the People’s Bank of China and the government have joined forces to restore confidence with significant rate cuts, easing guidance and upcoming fiscal stimulus. 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.
- In the UK, valuations remain attractive and the BoE is poised to cut interest rates.
- 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 to our equities allocation to reflect the latest developments in the US and China. Our overweight position 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, whose momentum is gaining traction.
We also take into account the upcoming yield curve steepening which will have major consequences for investors too.
In our sector allocation, we are overweight global Healthcare for its defensive quality, European Real Estate for its interest rate sensitivity and neutral US Technology and Small Caps.
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.