Coffee Break

Last week in a nutshell

• US midterms reshaped the AI backdrop, with Democrats taking Congress and key governorships as data-centre restrictions became a prominent campaign issue.
• AI concerns broadened sharply, as markets repriced slower data-centre buildout, with state-level permitting and infrastructure rules emerging as a more immediate constraint on capex.
• US labour data stayed firm, with October payrolls surprising to the upside and unemployment falling.
• Middle East risks eased abruptly, as signs of US-Iran diplomatic progress pushed oil sharply lower and removed part of the inflation shock that had dominated recent weeks.
• Global tightening remained uneven but alive, with the BoE and RBA hiking while tighter financial conditions are increasingly complicating the case for further Fed tightening in the near future.

Investment convictions

Core scenario

• The catalyst corridor remains crowded, with AI financing and the Anthropic IPO now joining inflation data, earnings, COP31 and geopolitical meetings as the next tests for markets.
• Slight overweight Equities. US equities are slightly overweight, alongside maintained preferences for Japan and emerging markets.
• Macro conditions are strong, witness the robust US labour market and Q3 GDP numbers. US investment and consumption sustain expansion, while Europe’s recovery remains more dependent on public spending in Germany. Lower energy prices would provide additional support.
• Ongoing Q3 earnings releases remain supportive overall, though mega-cap tech failed to inspire; as the US season winds down, focus shifts to Europe and Asia.
• Limited additional tightening. Tightening financing conditions give the Fed scope to pause as underlying inflation becomes less concerning.

Risks

• AI financing and IPO risk. Further post-midterm volatility could force a lower Anthropic valuation or delay the IPO beyond Thanksgiving, tightening sentiment across the broader AI complex.
• Earnings disappointment. Elevated expectations and concentrated leadership leave equities vulnerable to weaker guidance and margin pressure.
• Geopolitical fragmentation. Entrenched US–China rivalry and renewed trade friction could disrupt supply chains, investment and corporate margins.
• Renewed energy pressure. A reversal in Iran de-escalation could lift energy costs again, squeeze demand and complicate the path for monetary policy.
• Fiscal credibility. Heavy issuance and political uncertainty could push yields and sovereign spreads higher, tightening financing conditions without stronger growth.

Cross asset strategy

• We are slight overweight on equities. We are slightly overweight US equities, alongside maintained preferences for Japan and emerging markets.
• Regional allocation:
  • Slight overweight United States. Resilient economic growth and broadening earnings momentum into next year is supporting equity markets.
  • Slight overweight Japan. Supportive government initiatives and a relatively prudent BoJ provide a favourable backdrop for risky assets.
  • Neutral Europe. Sector composition appears less exposed to dominant market themes.
  • Slight overweight Emerging markets, with China tactically upgraded to overweight. China’s recent underperformance, attractive valuation and oversold conditions improve the near-term risk/reward, while potential policy support offers an additional catalyst. More broadly, Emerging Markets valuations remain attractive versus developed markets, with technology still a supportive but volatile driver.
• Factor and sector allocation:
  • We favour themes that benefit from long-term investment cycles.
  • We remain constructive on the Healthcare sector and keep exposure to some industrial stocks benefitting from expansionary budgets.
• Government bonds:
  • We are long Core European Bonds duration. The Iran war has led to an inflation-driven repricing. Therefore, ECB central bank expectations have been cemented into rate hikes. We focus on high quality, core-European AAA-rated sovereign bonds, which still enjoy both fiscal and central bank credibility.
• Credit:
  • Despite recent widening, spreads in European Investment Grade remain insufficient to create a broad valuation opportunity while macro uncertainty remains elevated. For the moment, we favour maintaining selectivity.
  • Neutral on Investment Grade credit in both the US and Europe. High Yield technicals are deteriorating amid outflows and increasing supply, justifying the recent spread widening. Within High Yield we’re neutral on Europe and negative on the US.
  • We are positive on Emerging market debt via Sovereign Local Currency debt as the spread tightening trend is unfolding again and there is some leeway to see further compression ahead. In addition, current yields represent an attractive carry for this income-diversifier position.
• Alternatives:
  • We remain constructive on gold over the medium term.
  • We hold precious and strategic metals, alternatives and market-neutral strategies for portfolio stability and diversification.
• Currencies:
  • The current market regime favours currencies linked to commodities. Therefore, we have long positions in AUD.
  • We remain long JPY.

Our Positioning

This month forms a dense catalyst corridor, with central-bank decisions, mega-cap earnings, political votes, fiscal tests, geopolitical summits and the much-anticipated Anthropic IPO arriving in quick succession. After major central banks paused, and earnings amongst the largest tech companies somewhat failing to inspire markets, last week markets were dominated by a sharp repricing of the AI investment cycle after the US midterm result. Democrats were able to win control of both the House and the Senate, as well as several gubernatorial elections. Many Democratic governors ran on “stop the data centers” campaigns and are now running key AI states: markets are weighing the impact on the data centre buildout and a possible slowdown in AI Capex as a result. This has already caused financial conditions to tighten for Tech companies. A broadening towards other sectors in the economy could make an additional Fed hike in December less plausible, which could support equities going forward. Our positioning remains mildly constructive as global activity remains robust, with a slight overweight in equities through the US, Emerging Markets and Japan. In fixed income, we acknowledge the adjustment in global sovereign bonds. Rising rates create a more demanding environment. We favour Emerging Market debt and are constructive on high quality, core European duration. Within credit, we prefer European Investment Grade over High Yield, where risk premia remain limited despite the recent repricing. We maintain a preference for the JPY as a hedge, which remains historically extremely undervalued, selected emerging-market currencies and keep commodity-linked currencies such as AUD. Finally, gold, strategic metals and alternative strategies continue to play an important diversification role in a world of supply constraints, policy divergence and real-rate volatility.