Coffee Break

Last week in a nutshell

• Central banks made clear that they are ready to move if needed, noting upside risks for inflation and downside risks for growth.
• The ZEW survey gave first evidence that the current shock on sentiment is similar to the one experienced during the pandemic outbreak or the “Liberation Day” last April.
• February US producer price data surprised to the upside ahead of the onset of the conflict, highlighting the additional risk of rising price pressures driven by higher energy costs.
• After Israeli forces conducted an airstrike on the South Pars gas field in Iran, a retaliation attack hit Qatar’s Ras Laffan Industrial City, damaging about 17% of Qatar’s LNG export for 3-5 years.
• US Defence Secretary Pete Hegseth has confirmed that the Pentagon is seeking an additional $200 billion in supplemental funding.

Investment convictions

Core scenario

• Becoming more neutral: We downgraded our equity overweight to neutral while monitoring the situation in the Middle East closely. History shows geopolitical pullbacks are short-lived unless they become a sustained macro shock. A prolonged oil spike would eventually erode purchasing power and confidence, as historical precedents illustrate.
• Supportive macro context ahead of the start of the Iran war. Macro conditions were supportive until end-February but are no longer the dominant driver of market leadership. US growth continued to rest on private domestic demand, with investment -especially AI related capex – playing a larger role than consumption.
• Monetary policy ambiguity. The Federal Reserve easing now seems conditional on the evolution of energy prices. The ECB is no longer “in a good place” and will have to manage inflation expectations. Finally, the Bank of Japan and the Reserve Bank of Australia remain in tightening mode.

Risks

• Iran war. The duration of the war and the effective closure of the Strait of Hormuz, the diffusion towards other countries and beyond energy commodities to soft commodity prices, and the damage to the energy infrastructure in the region represent the key risks for the growth inflation mix.
• Geopolitical fragmentation. The US–China rivalry remains entrenched, while energy supply and global trade patterns continue to shift. 
• Fed dilemma. The oil shock and a divided FOMC could delay further easing, risking a pause in liquidity support. There is a risk that tariff-related price gains together with energy price related pressure, 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.

Cross asset strategy

• We have downgraded equities to neutral, with Emerging Markets, Europe and Japan – the largest energy importers – facing the sharpest headwind.
  • Our overall positioning is Neutral, the single slightly positive stance being limited to the US.
• Regional allocation:
  • United States: Slight Overweight. The United States remain relatively more insulated thanks to domestic energy production and still-resilient private demand.
  • Japan: Neutral. Structural energy import dependence.
  • Europe: Neutral. Acute exposure to Middle Eastern oil and LNG dynamics and vulnerability to renewed headline inflation.
  • Emerging Markets: Neutral. The region was one of the best performers year-to-date, but in the new geopolitical environment it is also the most vulnerable to higher oil prices and a rising USD.
• Factor and sector allocation:
  • We remain constructive for both Healthcare and Tech. Within the software sector, a large dispersion of business models exists, some of which are more impacted by Artificial General Intelligence than others. The whole sector has sold off indiscriminately, creating opportunities.
  • We keep some exposure to European Industrials as well as German and US small- and mid-caps as they are somewhat shielded from expansionary budgets and planned deregulation.
• Government bonds:
  • We are slightly long core European duration but have recently reduced the overall duration exposure. A spiking oil price, if it remains at elevated levels, will feed through in inflation and interest rate expectations for the ECB.
  • US Treasuries remain Neutral, with the upcoming Fed reshape adding complexity.
• Credit:
  • Spread widening in European Investment Grade has been limited, insufficient to create a broad valuation opportunity while macro uncertainty remains elevated. With yields higher but dispersion increasing, we favour maintaining selectivity rather than holding an overweight position.
  • Preference of 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 high real interest rates.
• Alternatives:
  • Despite a marked increase in volatility, Gold remains a key conviction as a hedge against geopolitical risks and real rate volatility; supported by strong central bank buying and investor flows.
  • We retain allocations to alternative strategies for portfolio stability and diversification
• Currencies:
  • The current market regime favours currencies linked to commodities such as precious metals and oil. Therefore, we have long positions in AUD, NOK and BRL.
  • We remain underweight on the USD but have reduced this underweight materially on renewed geopolitical escalation.
  • We are also long JPY.  

Our Positioning

The war in Iran remained in focus for a third week, with strikes on important oil and gas fields at the centre of attention. These strikes led financial markets expectations regarding inflation and central bank reactions to move upward: Bond yields moved higher and risky assets faced renewed downward pressure as investors reassessed the likelihood of a prolonged “higher-for-longer” rate environment, which also weighed on the price of gold. Against this backdrop, major central banks, including the Fed, ECB, BoJ and Bank of England, kept policy rates unchanged but adopted overall a more hawkish tone, emphasizing heightened uncertainty and reduced visibility on the rate path. The Reserve Bank of Australia continued hiking interest rates, confirming its more restrictive interest rate path. We have downgraded equities to neutral, with Emerging markets, Europe and Japan facing the sharpest headwind. US policy objectives in the war remain uncertain. Washington has so far shown little urgency to bring energy prices down, with recent statements suggesting that short-term oil market disruption is seen as an acceptable cost. That said, a prolonged spike would carry domestic economic and political consequences. Until there is greater clarity on the conflict's trajectory and US strategic intentions, we prefer to reduce risk in the regions most directly exposed to an energy shock. In fixed income, we have reduced the overall duration and credit exposure.