Coffee Break

Last week in a nutshell

• Main data releases in the US were the soft jobs and housing reports for December, while the composite PMI pointed towards economic expansion, thanks to the non-manufacturing (aka services) component.
• European core inflation came in lower than expected while headline inflation stood at 2%, in line with expectations, leaving the ECB “in a good place”.
• German factory orders and industrial production data surprised on the upside, showing support of the buildout of European defence and energy infrastructure.
• In China, CPI nudged up slightly, the highest since February 2023, as domestic demand is still weak and PPI deflation eased to -1.9%, the least since July 2024, but a full reversal of PPI deflation will likely take time.
• On the geopolitical front, the resurrection of the Monroe doctrine of 1823 has opened new questions regarding the scope of the “Western Hemisphere”.

Investment convictions

Core scenario

• Visibility Restored. The fog is lifting. Global markets enjoy better visibility at the end of 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, 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.
• 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.
• 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 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. There is a risk that tariff-related price gains together with the reversal of the downward biases in the November 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.
• 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. 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. 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 significantly upgraded its growth projections while keeping its key interest rate steady at 2.0% but retains flexibility for 2026.
  • Emerging Markets: Slight Overweight: Emerging equities benefit from a US – China trade truce until end-October (2026), 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 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 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 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

We see continued resilience in Europe and the US: PMIs in both regions pointing towards economic expansion. European core inflation came in lower than expected while headline inflation came in at 2%, in line with expectations, leaving the ECB in a “good place”. Manufacturing orders and industrial production surprised again on the upside in Germany. German fiscal spending on defence and the buildout of energy infrastructure is clearly kicking in, confirming our positioning. We stay overweight equities, with a balanced regional allocation. Equity exposure favours structural momentum: US technology for earnings leadership, Europe for value and recovery, Japan for reform, and Asia for cost-efficient access to AI and semiconductors. 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. Portfolios balance structural growth with disciplined selection across asset classes.