Coffee Break

Last week in a nutshell

• Kamala Harris gained momentum in the US Presidential race after the intense debate with Donald Trump on the economy, foreign policy, immigration, and abortion.
• Also in the US, the CPI for August rose 2.5% YoY, the lowest since February 2021 but core inflation increased slightly more than expected, lowering the likelihood of a 50bp rate cut by the Fed.
• The ECB eased its monetary policy by 25bp to 3.5% but provided little clues to its next step.
• Former ECB president Mario Draghi delivered a competitiveness report to the European Commission, suggesting common borrowing and spending across Europe.

Investment convictions

Core scenario

• Our central forecast predicts a soft landing of the US economy but we acknowledge that economic growth has become the main focus, superseding inflation, which is entering a new regime.
• US growth forecasts for 2025 are increasingly influenced by political and monetary factors. EU’s sluggish growth is dependent on a pick-up in business and consumer activity, while China's growth remains subdued.
• The cooling of inflation – and core inflation – is a synchronised global development. Supportive (i.e. lower) inflation news also paves the way for European central banks (e.g., ECB, BoE, SNB, Riksbank) to further cut interest rates by the end of this year. With several emerging market central banks already cutting since 2023, and the Federal Reserve finally joining the chorus, the long-awaited global easing cycle is picking up pace.

Risks

• Looking ahead, we caution against policy decisions that lead to higher tariffs and a tighter labour market in the US, which could ultimately lead to rising inflation again or significantly higher taxes, which could weigh on growth.
• The upcoming change in the White House and the potential reprioritisation of US economic policy could affect the speed and extent of monetary easing.
• Geopolitical risks to the outlook for global growth remain tilted to the downside with the war between Russia and Ukraine, the potential resumption of international trade tariffs, and developments in the Middle East.

Cross asset strategy

1. Financial markets are being shaped by growth concerns and political uncertainties, leading to lowered expectations in several areas and the potential for positive developments later.
2. We disagree with the market, which prices a Fed policy that cuts rates by as much as 100bp by year-end, implying at least one 50bp rate cut at one of the remaining three FOMC meetings. By the same token, we disagree with the market pricing less rate cuts by the ECB than we forecast.
3. Hence, we hold a long duration via European debt, are neutral US duration, and hold a neutral equity stance with a relative regional preference for the US.
4. We prefer developed markets vs emerging markets, and besides the US, also invest in UK equities for their defensive characteristics.
   • In the US, we are exposed to the broad market.
   • In the UK, valuations remain attractive with the potential for multiple expansion and the BoE poised to cut interest rates.
   • In the euro zone, conservative veteran Michel Barnier was appointed as France’s prime minister. This might appease political uncertainty in the short term but the government faces the budget hurdles as soon as this Autumn.
   • We are tactically neutral Japan as further yen strengthening and emerging political uncertainties could be a challenge.
   • We are neutral emerging markets, as the Chinese consumer has yet to gain confidence and deflationary pressure persists.
5. In the equity sector allocation:
   • We are positive on the healthcare sector. Recent earnings indicate that the normalisation of overearning from COVID, due to destocking excess inventories and demand for COVID-specific products, is mostly complete.
   • We are buyers of European Real Estate, which should benefit from lower interest rates.
   • We are neutral Small caps & Tech sector.
6. In the fixed income allocation, government bonds are an attractive investment as they offer a hedge in a multi-asset portfolio. Also, we see little room for credit spreads to tighten further:
   • We favour carry over spreads, with a focus on quality issuers: we maintain our long-duration bias via Germany and the UK.
   • We are neutral on US duration.
   • We have a relatively small exposure to emerging markets' sovereign bonds amid very narrow spreads.
   • We are neutral on investment grade and high-yield bonds, regardless of the issuers’ region.
7. We keep an allocation to Alternative investments and to gold.

Our Positioning

Our positioning reflects our belief in the soft landing of the US economy along with caution amid uncertainty. Within equities, we express our views through a preference for the broad US market. On this side of the Atlantic, we prefer UK equities relative to the euro zone. In our sector allocation, we are overweight global Healthcare for its defensive quality, European Real Estate for its interest rate sensitivity and neutral US Technology and Small Caps.
Our bond strategy reflects our view that inflation has normalised and the correlation between equities and bonds is reverting, thereby enabling safe bonds to resume their protective role within a diversified portfolio. We maintain a long duration via German and UK sovereign bonds. Simultaneously, we remain neutral on corporate investment grade and more cautious on global high yield.