Coffee Break

Last week in a nutshell

• The market reaction following the Japanese general election was another vote of confidence for PM Sanae Takaichi: Yields stabilizing, Japanese yen strengthening and regional equities outperforming
• On the data front we observed mixed US releases including signs of cooling consumption, solid employment and benign inflation, with a lack of tariff pass-through.
• Investors closely watched geopolitical discussions at the annual Munich Security Conference.
• Indonesian authorities ordered cuts in output at the world’s largest nickel mine to revive prices of its biggest export commodity.

Investment convictions

Core scenario

• Supportive macro context. Macro conditions remain supportive, but in the current context they are no longer the dominant driver of market leadership. US growth continues to rest on private domestic demand, with investment – especially AI-related capex – playing a larger role than consumption.
• Fed’s gradualism. The Federal Reserve is entering a new phase of conditional easing. Policy divergence is emerging, with the ECB “in a good place” and the Bank of Japan in tightening mode – a normalisation rather than a threat.
• Markets moving out of sync. Regions, sectors and currencies are no longer moving in lockstep. Equal-weight indices diverge from cap-weighted benchmarks. Hardware outperforms software. Asia’s semiconductor exposure behaves differently from US platform names. Emerging-market currencies strengthen even as US rates remain elevated.

Risks

• Fed reshape. A divided FOMC could delay further easing, risking a pause in liquidity support. There is a risk that tariff-related price gains together with the reversal of the downward biases in the shutdown data, could lead to some inflation increases over the coming months.
• Fiscal credibility. Rising issuance and political noise could test bond market confidence and trigger volatility in yields.
• Geopolitical fragmentation. The US–China rivalry remains entrenched, while energy supply and global trade patterns continue to shift. Also, the US intervention in Venezuela has demonstrated the current US military capabilities and enforcement willingness.

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: Tech and AI leadership
  • Japan: Slight Overweight: Reform and fiscal spending after snap elections act as a support.
  • Europe: Slight Overweight: Resilience to tariff news and wider geopolitical uncertainties as Germany’s expansionary budget is now being put to action.
  • Emerging Markets: Slight Overweight: Cheap AI exposure, weak USD. Looming elections and commodity support from LatAm. US-China trade truce and additional détente in trade relations (US-India).
• Factor and sector allocation:
  • We remain constructive for both Tech and Healthcare.
  • We keep exposure to European Industrials as well as German and US small- and mid-caps as they are benefitting from expansionary budgets, lower financing costs and planned deregulation.
• Government bonds:
  • We are constructive on core European duration, where stable ECB policy and low inflation expectations should anchor yields.
  • US Treasuries remain Neutral, with the upcoming Fed reshape adding complexity.
• Credit:
  • Positive on European Investment Grade credit versus US Investment Grade credit and High Yield
  • Emerging Market debt is an Overweight on attractive yields, better trade visibility, and dovish Fed support.
• Alternatives:
  • Despite a marked increase in volatility, Gold remains a key conviction as a hedge against geopolitical risks, real rate volatility, and a weaker USD; supported by strong central bank buying and investor flows. More cautious on silver.
  • We retain allocations to alternative strategies for portfolio stability and diversification
• Currencies:
  • Expectations of a softer USD are reflected in currencies linked to structural demand for commodities and capital goods. In particular, the preference for a “long base metals, short oil” stance is expressed through a positive view on AUD versus a negative view on the CAD. We are also long JPY.
  • We hold selective long positions in EM currencies with strong fundamentals.

Our Positioning

Equity indices fluctuated, supported by resilient earnings and expectations of policy easing, but gains faded amid profit-taking in large-cap technology and lingering concerns about stretched valuations. In commodities, precious metals consolidated after recent strength. On the economic front we observe mixed US data including signs of cooling consumption, a stronger than expected employment report and slower than expected rise in consumer price inflation. We stay overweight equities, tweaking our balanced regional allocation by adding slightly to Emerging markets. Equity exposures reflect Europe for value and recovery, Japan for reform, and Emerging markets for cost-efficient access to AI and semiconductors and access to commodities. Our key themes include electrification bottlenecks – supportive of some utilities, infrastructure, and metals – alongside healthcare and biotech for idiosyncratic growth. In fixed income, duration serves as portfolio insurance amid divergent rate paths, while selective European credit and EM debt offer attractive carry. We anticipate a softer US dollar, remain constructive on metals, and retain a cautious stance on oil.