Coffee Break

Last week in a nutshell

• The Iran war is reigniting energy-driven inflation, with the US core CPI surprise underscoring renewed price pressures.
• The US consumer is feeling the strain, as sentiment deteriorated sharply against the backdrop of higher energy costs, with US diesel crossing $6/gallon for the first time as Middle Eastern and Russian gasoil exports collapsed.
• Central banks are being pushed further into tightening mode, with the ECB delivering its second rate increase since the Iran war began.
• France added another note of concern, cutting its 2026 growth forecast to 0.5% from 0.7% as the Bank of France governor described the economy as “worrying”.
• On the earnings front, Oracle delivered strong results, with cloud infrastructure revenue more than doubling and an order backlog highlighting continued momentum in AI-related demand.

Investment convictions

Core scenario

• Slight Overweight Equities: We remain constructive for global equities.
• Macro conditions set to improve, but fragile. Macro conditions are supportive in the US and could further improve in the rest of the world if energy prices decline. US growth continued to rest on private domestic demand, with investment – especially AI-related capex – playing a large role. However, ongoing tensions in Iran pose a risk to our scenario.
• An activist US Treasury policy. Beyond the immediate market reaction, the move adds to unease around an increasingly activist Treasury and, more broadly, the US policy mix.
• Global monetary policy divergence. The Fed is expected to raise its reference rate this year while a hawkish ECB is managing inflation expectations, signalling potential ongoing rate hikes. Finally, the Bank of Japan remains in tightening mode.

Risks

• Geopolitical fragmentation. The US–China rivalry remains entrenched, while energy supply and global trade patterns continue to shift.
• Ongoing tensions in Iran. A resolution is paramount for our core scenario to hold. In the meantime, the situation in Iran remains very fragile and volatile.
• Fed dilemma. A resilient economy and divisions within the FOMC could lead to monetary tightening. Kevin Warsh will have to build a new policy consensus and convince investors on his approach.
• Fiscal credibility. Rising issuance and political noise could test bond market confidence and trigger volatility in yields.

Cross asset strategy

• We are slight overweight on equities via regional preferences of Emerging markets and Japan, while holding a neutral stance on the US and Europe.

Regional allocation:

• Neutral United States. This stance reflects our neutral stance on the US Technology sector as Tech-sensitive exposures carry roughly half of the weight in the broad US market.
• Slight overweight Japan. Supportive government initiatives and a relatively prudent BoJ provide a favourable backdrop for risky assets. Also, its world-leading franchises in robotics, factory automation and industrial equipment should position the market to benefit from the next phase of AI-driven productivity growth.
• Neutral Europe. The region could benefit from easing energy prices if tensions in the Middle East decline, but sector composition appears less exposed to dominant market themes. Fiscal spending in Germany is kicking into full gear.
• Slight overweight Emerging markets. A selective approach within the region is warranted, but the overall strong exposure to Tech is a supportive though volatile factor. Valuation is attractive as the relative 12m forward PE of the MSCI Emerging Markets index reveals a significant discount to the MSCI World index.

Factor and sector allocation:

• We favour themes that benefit from long-term investment cycles.
• We remain constructive on the Healthcare sector and keep exposure to EU and US mid-caps and some industrial stocks as they are shielded thanks to expansionary budgets and planned deregulation.

Government bonds:

• We are long Core European Bonds duration. The Iran war has led to an inflation-driven repricing. As a consequence, ECB central bank expectations have been cemented into rate hikes. We focus on high quality, core-European AAA-rated sovereign bonds, which enjoy both fiscal and central bank credibility.

Credit:

• Spread widening in European Investment Grade has been very 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. For the moment, 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 Europe and negative on the US.
• We are positive on Emerging market debt via Sovereign Local Currency debt as the spread tightening trend is unfolding again and there is some leeway to see further compression ahead. Also, EM FX appears best placed to benefit from renewed potential USD weakness. In addition, the current Yield-to-Maturity of ca. 7% represents an attractive carry for this income-diversifier position.

Alternatives:

• We remain constructive on gold as the precious metal rebounded strongly from the important 4,000 USD/oz support since end-July.
• 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. Therefore, we have long positions in AUD.
• We remain slightly underweight on the USD and are long JPY.

Our Positioning

Our positioning remains constructive as global activity remains resilient, with a slight overweight in equities through Emerging Markets and Japan. Overall, the macro backdrop remains supportive allowing market leadership to broaden. In fixed income, we favour Emerging Market debt and are constructive on high quality, core European duration. Within credit, we prefer European Investment Grade over High Yield, where risk premia remain limited. We maintain a preference for the Japanese yen as a hedge, which remains historically extremely undervalued compared to the USD, selected emerging-market currencies and keep commodity-linked currencies such as AUD. Finally, gold, strategic metals and alternative strategies continue to play an important diversification role in a world of supply constraints, policy divergence and real-rate volatility.