Coffee Break

Last week in a nutshell

• The Reserve Bank of Australia increased its rate to 3.85% in a unanimous decision, partially reversing one of the shortest and shallowest easing cycles last year.
• In the euro zone January CPI inflation hit 1.7% YoY, leaving the ECB “in a good place”, and sticking to a data-dependent, meeting-by-meeting approach.
• In the US, planned job cuts rose in January, while hiring plans looked sluggish too, and initial jobless claims rose as cold weather gripped the country.
• Solid tech earnings mask a more concerning trend: Increased forecasts on capital expenditures reaching about $650bn 2026 for new data centres and gear add to uncertainty about returns on invested capital.

Investment convictions

Core scenario

• Visibility Restored. The macro backdrop as we move well into 2026 is overall constructive for risky assets. Growth remains supportive in the US and in Europe while inflation is converging toward target, i.e., below 2% and below 3% in the US. We are not in a boom, but in a Goldilocks-like environment where activity holds up without reigniting inflation pressures.
• Fed’s gradualism. The Federal Reserve, after back-to-back cuts in September, October and December, 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.
• Regional balance. Europe benefits from fiscal support and resilient PMIs, while China’s trade truce with the US buys time for adjustment. Emerging Markets enjoy renewed inflows, high carry, and a weaker US dollar. Divergence, once feared, now signals equilibrium.
• Valuations high but justified. Equities trade at premium multiples, led by US Tech, yet balance sheets are strong and earnings momentum positive.

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: The Fed’s dovish pivot in September has set the stage for further easing in 2026. US tech remains a core conviction amid resilient growth.
  • Japan: Slight Overweight: Trade visibility and tariff relief continue to support cyclical sectors. The snap election called by PM Sanae Takaichi is set to strengthen structural reform and could represent an important step to eliminate the discount on Japanese equities.
  • Europe: Slight Overweight: The economies and the corporate sector have shown resilience to tariff news and wider geopolitical uncertainties as Germany’s expansionary budget is now being put to action. The ECB is keeping its key interest rate steady at 2.0% but retains flexibility for 2026, as the euro remains relatively strong.
  • Emerging Markets: Slight Overweight: Emerging equities benefit from a US – China trade truce until end-October, a softer USD and improved trade visibility – witness the recent US deal with India. 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 banking stocks, European Industrials as well as 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 should anchor yields.
  • US Treasuries remain Neutral, with the upcoming 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:
  • Despite a marked increase in volatility, 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 retain allocations to alternative strategies for portfolio stability and diversification.
• Currencies:
  • Expectations of a softer US dollar 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 Australian dollar versus a negative view on the Canadian dollar, and a tactical long Japanese Yen.
  • We hold selective long positions in EM currencies with strong fundamentals.

Our Positioning

Early February saw a substantial rise in volatility across equity and metals markets. On the other hand, bond volatility stabilised since the start of the year. Earnings season is in full swing, and investors are taken aback by the massive AI capex-plans of the Mag 7. Investors continue to worry about the durability of the business model for software companies, given recent AI breakthroughs. On top of that, doubts about the strength of the US labour market fuel the rising uncertainty. We stay overweight equities, tweaking our balanced regional allocation by reducing some positions in the US. 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 dollar, remain constructive on metals, and retain a cautious stance on oil.