Coffee Break

Last week in a nutshell

• The last FOMC of the year delivered the anticipated cut, upgraded growth, trimmed inflation, announced new bond buying, and Chair Jerome Powell offered a case for AI-driven productivity.
• In Switzerland, the SNB kept rates at 0% and lowered its near-term inflation forecast. It views the current policy stance as appropriate with no dovish tilt towards negative rates.
• Recent data releases in the US remain largely consistent with a labour market that remains soft but only mildly cooling and with no clear-cut evidence of meaningful further weakening.
• German industrial production rose more than expected in October, supporting assumptions that the economy will rebound and return to growth in the final quarter.
• In France, Prime minister Lecornu secured the vote of the social security budget, a first step in the overall budget process.

Investment convictions

Core scenario

• Visibility Restored. The fog is lifting. Global markets enjoy better visibility than at any point this year – growth stronger than anticipated, inflation lower than expected, and policy broadly supportive. After weeks of patchy data and hesitant sentiment, confidence is returning to markets as activity holds up and volatility subsides.
• Fed’s gradualism. The Federal Reserve, after back-to-back cuts in September and October, is entering a new phase of conditional easing. Policy divergence is emerging, with the ECB is “in a good place” and the Bank of Japan preparing to tighten – a normalisation rather than a threat.
• Financial conditions improve. Liquidity is ample, credit stable, and real yields remain positive but manageable. Growth around 2% in the US and 1% in Europe supports our soft-landing scenario. US inflation is set to peak near 3.75% before easing in 2026.
• Regional balance. Europe benefits from fiscal support and improving PMIs in expansion territory, while China’s trade truce with the US buys time for adjustment. Emerging Markets enjoy renewed inflows, high carry, and a weaker 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 hesitation. A divided FOMC could delay further easing, risking an untimely pause in liquidity support.
• Fiscal credibility. Rising issuance and political noise could test bond market confidence and trigger volatility in yields.
• European politics. Cohesion risks persist as France remains a fiscal flashpoint; political noise could weigh temporarily on sentiment.
• Geopolitical fragmentation. The US–China rivalry remains entrenched, while energy supply and global trade patterns continue to shift.

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. US tech remains a core conviction amid resilient growth.
  • Japan: Slight Overweight: Trade visibility and tariff relief continue to support cyclical sectors, especially exporters. The election of Sanae Takaichi is symbolizing structural reform and diversity in leadership and is therefore seen as an important step to eliminate the discount on Japanese equities.
  • Europe: Slight Overweight: Tariff relief offers support, and Germany’s expansionary budget has been approved. The ECB is on hold but retains flexibility.
  • Emerging Markets: Slight Overweight: Emerging equities benefit from a US -China trade truce until next year, a softer USD and improved trade visibility. 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 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 anchor yields.
  • US Treasuries remain Neutral, with tariff-driven inflation and a 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:
  • 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 have taken some profits following the parabolic rise in recent weeks.
  • We acknowledge that the US dollar remains the key pivot for emerging markets and precious metals.
  • We retain allocations to alternative strategies for portfolio stability and diversification.
• Currencies:
  • We remain underweight USD, as Fed easing and political pressure weigh on the currency.
  • We favour defensive currencies such as the Japanese yen and hold selective long positions in EM currencies with strong fundamentals.

Our Positioning

The Fed delivered the anticipated cut, upgraded growth, trimmed inflation, announced new bond buying, and Chair Jerome Powell offered a case for AI-driven productivity – a “Goldilocks” mix that surpassed expectations. Equities responded in kind as the S&P 500 closed at a record high, while the Russell 2000 small and mid-caps registered new record highs. In fixed income, the US curve steepened meaningfully, and rising Japanese yields pushed the German Bund through the critical 2.80% threshold for the first time since March. We stay overweight equities, with a balanced regional allocation and a particular focus on Europe and Emerging Markets, where cyclical catch-up meets structural support. In the US, we increased US small and mid-caps and added to Financials. We favour resilient global themes such as Technology & AI and Healthcare and see German mid-caps as a fiscal-driven catch-up trade. In fixed income, we continue to favour Emerging Market debt – supported by attractive yields, tariff relief, and improving flows – and remain constructive on core European duration, while preferring European Investment Grade over High Yield.