Coffee Break

Last week in a nutshell

• The Fed held rates steady, as expected, but sees stagflation risks. The FOMC statement noted that “risks of higher unemployment and higher inflation have risen”.
• The BoE cut rates by 25bps to 4.25%. Riksbank and Norges Bank stayed on hold but hinted at possible cuts later this year due to rising economic risks.
• The US trade deficit widened to a record $140.5bn in March, driven by a sharp rise in imports ahead of the US tariff announcements on April 2^nd.
• The US and UK announced a trade deal in a first step to rebalance and rebuild international trade after last month's “Liberation Day”.
• During a Summit in Moscow, Russian President Vladimir Putin and Chinese President Xi Jinping called for closer bilateral relations and reaffirmed China's support for Russia.
• Friedrich Merz was elected German Chancellor in a second-round vote, forming a CDU-SPD coalition and ending months of political deadlock.
• OPEC+ agreed to accelerate oil production hikes despite falling prices and expectations of weaker demand.

Investment convictions

Core scenario

• While potential de-escalation could bring supportive impulses (rate cuts, weaker dollar, lower oil/tariffs), complexities remain; a reality check looms as hard data rolls in.
• In the US, tariffs are beginning to weigh on decisionmakers, rising inflation complicates the Fed’s response, despite expectations of rate cuts and a weaker dollar.
• The euro zone is facing pressure to deliver a fiscal impulse amid tariff headwinds; the ECB is likely to continue easing to counter inflation and trade shocks.
• China responded with earlier-than-expected retaliation to US tariffs. Deflation persists and may worsen, highlighting domestic economic fragility.

Risks

• Market complacency risk: Despite ongoing economic headwinds, markets appear optimistic that the tariff cycle has peaked. Reflationary forces have supported sentiment, but the underlying damage from elevated prices and policy uncertainty may be underestimated.
• Geopolitical risk to US assets: The Trump administration’s confrontational trade stance continues to erode global investor confidence in US assets, while slowing domestic momentum calls for greater caution.
• Earnings risk: Although US EPS growth for 2025 has started to be revised downward, further negative revisions are likely. Tariff de-escalation may have delayed rather than prevented earnings pressure, especially in sensitive sectors like semiconductors and pharma.
• China risk: China remains highly exposed to policy volatility and remains a central target of US trade and geopolitical tensions, posing ongoing risks to regional and global stability.

Cross asset strategy

1. Although uncertainty remains, markets celebrate that an end has been put to the self-inflicted escalation and that the tariff peak appears behind us. Lower expected interest rates, a lower USD, and a lower price of oil are easing financial conditions and acting as market and macro stabilisers. We acknowledge all these developments have led to a rebound in financial markets. Our strategy reflects caution amid high uncertainty and a wide range of potential economic outcomes and flexibility, allowing us to adapt as conditions evolve.
2. Global equities:
   • Our positioning is slightly underweight equities, with no clear regional bias – adopting a nimble approach.
3. Regional allocation:
   • US equities appear fully valued, with markets pricing in a benign outcome on trade and policy. This limits upside potential and may increase vulnerability to disappointment.
   • Europe and Emerging Markets, while more exposed to trade tensions, could be supported by stronger fiscal responses and more attractive valuations, partially offsetting tariff-related headwinds.
4. Factor and sector allocation:
   • In this environment, our sector allocation remains defensive, favouring quality, visibility, and resilience to potential economic slowdown, rather than chasing cyclical or high-beta segments.
5. Government bonds:
   • European sovereign bonds continue to benefit from recession concerns, subdued inflation expectations, and the ECB’s supportive stance. In a multi-asset portfolio, they add valuable decorrelation and serve as a defensive anchor in the event of renewed market volatility.
6. Credit:
   • We maintain a neutral stance on investment grade credit. While spreads are tight and offer limited upside, fundamentals remain solid. Central bank support and low default expectations continue to provide a backstop, but valuations leave little room for error.
   • We remain underweight high yield and emerging market debt, as these segments are more sensitive to global growth concerns, deteriorating corporate fundamentals, and tighter financial conditions. In our view, the risk-reward is currently skewed to the downside.
7. Alternatives play a crucial role in portfolio diversification:
   • We continue to see value in alternative assets—notably precious metals such as gold and silver, which remain effective hedges in an environment of heightened volatility and trade uncertainty.
8. In currencies, exchange rates will remain a focal point in trade discussions and broader market dynamics:
   • We have a positive view on the Japanese yen, which we see as a likely beneficiary of increased risk aversion.
   • We expect the US dollar to weaken, as the Fed appears stuck between risks of higher unemployment and higher inflation, and as global growth stabilizes outside the US. Additionally, diminishing safe-haven flows and the US’s twin deficits add pressure on the dollar over the medium term.

Our Positioning

In an environment marked by lingering uncertainty but easing financial conditions, our multi-asset strategy remains cautiously positioned with a slight underweight in equities and a defensive sector tilt. We maintain flexibility across regions and asset classes, reflecting a wide range of potential outcomes. We favour European rates for their defensive qualities, remain selective in credit with a neutral stance on investment grade, and stay underweight high yield and emerging debt. Alternatives like precious metals continue to enhance diversification, while in currencies, we are positive on the yen and expect a gradual weakening of the US dollar. Our approach balances risk management with the agility to adapt as macro conditions evolve.