Last week in a nutshell
- Following more dovish remarks from Fed voters, global markets staged a comeback from the sharp drawdown of the first November weeks.
- Chancellor of the Exchequer Rachel Reeves laid out the 2026 UK budget, implying more fiscal stability, but less credibility, as most of the fiscal consolidation measures are back-dated.
- Flash inflation releases for November came out below expectations in France and Italy but increased more than expected in Germany and Spain.
- Despite recent diplomatic initiatives on Ukraine, there remains a general scepticism as Polymarket odds still only suggest a 27% chance that a ceasefire will be reached by the end of March.
What’s next?
- At the start of the final month of the year, investor focus will be on global PMIs to gain insights into activity, prices and jobs in the manufacturing and services sector globally.
- November consumer price inflation estimates for the euro zone as a whole will be a major release, given the mixed signals from individual countries.
- We will focus our attention on consumer behaviour by listening to reports on Black Friday sales, analyse corporate earnings from Salesforce and Inditex and look at preliminary December Sentiment from the University of Michigan.
- On the geopolitical front, a US delegation will arrive in Moscow to discuss a peace plan on Ukraine.
Investment convictions
Core scenario
- Visibility Restored. The fog is lifting. Global markets enjoy better visibility than at any point this year – growth stronger than anticipated, inflation lower than expected, and policy broadly supportive. After weeks of patchy data and hesitant sentiment, confidence is returning as activity holds up and volatility subsides.
- Fed’s gradualism. The Federal Reserve, after back-to-back cuts in September and October, is entering a new phase of conditional easing. The October data blackout has created a paradox: Less information has made the Fed more cautious. Policy divergence is emerging, with the ECB “in a good place” and the Bank of Japan preparing to tighten – a normalisation rather than a threat.
- Financial conditions improve. Liquidity is ample, credit stable, and real yields remain positive but manageable. Growth around 2% in the US and 1% in Europe supports our soft-landing scenario. US inflation is set to peak near 3.75% before easing into 2026.
- Regional balance. Europe benefits from fiscal support and improving PMIs above 50, while China’s trade truce buys time for adjustment. Emerging Markets enjoy renewed inflows, high carry, and a weaker dollar. Divergence, once feared, now signals equilibrium.
- Valuations high but justified. Equities trade at premium multiples, yet balance sheets are strong and earnings momentum positive.
Risks
- Fed hesitation. A prolonged data blackout and divided FOMC could delay further easing, risking an untimely pause in liquidity support.
- Fiscal credibility. Rising issuance and political noise could test bond market confidence and trigger volatility in long-dated yields.
- European politics. Cohesion risks persist as France remains a fiscal flashpoint; political noise could weigh temporarily on sentiment.
- Geopolitical fragmentation. The US–China rivalry remains entrenched, while energy supply and global trade patterns continue to shift.
Cross asset strategy
- We hold a constructive stance on global equities over the medium-term:
- Our overall positioning remains Overweight, led by a positive view on all regions.
- Regional allocation:
- United States: Slight Overweight: The Fed’s dovish pivot in September has set the stage for further easing. US tech remains a core conviction amid resilient growth.
- Japan: Slight Overweight: Trade visibility and tariff relief continue to support cyclical sectors, especially exporters. The election of Sanae Takaichi is symbolizing structural reform and diversity in leadership and is therefore seen as an important step to eliminate the discount on Japanese equities.
- Europe: Slight Overweight: Tariff relief offers support, and Germany’s expansionary budget has been approved. The ECB is on hold but retains flexibility.
- Emerging Markets: Slight Overweight: Emerging equities benefit from a US -China trade truce until next year, a softer USD and improved trade visibility. EM debt remains slightly overweighed, supported by attractive yields and lower funding costs.
- Factor and sector allocation:
- We favour a barbell approach with resilient themes such as Technology & AI, and Healthcare which remains supported as most of the bad news now appears discounted in the prices.
- We keep exposure to German and US small- and mid-caps as they are still likely to benefit from expansionary budgets and lower financing costs under a dovish Fed.
- Government bonds:
- We are constructive on core European duration, where stable ECB policy and low inflation expectations anchor yields.
- US Treasuries remain Neutral, with tariff-driven inflation and a Fed reshape adding complexity.
- Credit:
- We prefer European Investment Grade credit, where spreads are attractive versus US credit.
- High Yield has a more limited risk/reward given tight spreads and low embedded risk premia.
- Emerging Market debt is an Overweight on attractive yields, better trade visibility, and dovish Fed support.
- Alternatives:
- Gold remains overweight as a hedge against geopolitical risks, real rate volatility, and a weaker USD; supported by strong central bank buying and retail flows. We have taken some profits following the parabolic rise in recent weeks.
- We acknowledge that the US dollar remains the key pivot for emerging markets and precious metals.
- We retain allocations to alternative strategies for portfolio stability and diversification.
- Currencies:
- We remain underweight USD, as Fed easing and political pressure weigh on the currency.
- We favour defensive currencies such as the Japanese yen and hold selective long positions in EM currencies with strong fundamentals.
Our Positioning
Recent diplomatic initiatives on Ukraine and more dovish remarks from the Fed allow global markets to enter the final stretch of 2025 in a more constructive mood. A weakening US labour market, hitting consumption, or a potential AI air pocket, hitting corporate investment, will continue to represent risks into 2026. We remain overweight equities, with a balanced but constructive allocation across all regions, notably Europe and Emerging Markets, which combine cyclical catch-up with structural support. We like resilient global themes such as Technology & AI and Healthcare. Closer to us, we emphasise German mid-caps as a catch-up trade, fuelled by fiscal stimulus. On the fixed income side, our strategy includes Emerging Market debt, supported by attractive yields, tariff relief, and improved investor flows. We also remain constructive on core-European duration while in credit we continue to prefer European Investment Grade over High Yield.