Coffee Break

Last week in a nutshell

• US and Israeli strikes as well as Iranian retaliation in the Middle East region continue to paralyse shipping lanes and air traffic, fuelling inflation expectations.
• The first data release for the current month showed that US consumer sentiment declined to a new low for 2026, due to fears about the impact on gasoline prices from the war with Iran.
• Further on the US data front, Q4 real GDP was revised down to 0.7% implying that over the four quarters of 2025 real GDP has expanded 2.0%.
• Following last week’s disappointing US job report, employment slipped further in February in Canada. The unemployment rate rose to 6.7%.

Investment convictions

Core scenario

• Becoming more neutral: We downgraded our equity overweight to neutral while monitoring the situation in the Middle East closely. History shows geopolitical pullbacks are short-lived unless they become a sustained macro shock. A prolonged oil spike would eventually erode purchasing power and confidence, as historical precedents illustrate.
• Supportive macro context ahead of the start of the Iran war. Macro conditions were supportive until end-February but are no longer the dominant driver of market leadership. US growth continues to rest on private domestic demand, with investment – especially AI related capex – playing a larger role than consumption.
• Monetary policy ambiguity. The Federal Reserve easing now seems conditional on the evolution of energy prices. The ECB is no longer “in a good place” and will have to manage inflation expectations. Finally, the Bank of Japan and the Reserve Bank of Australia remain in tightening mode.  

Risks

• Iran war. The duration of the war and the effective closure of the Strait of Hormuz, the diffusion towards other countries and beyond energy commodities to soft commodity prices, and the damage to the energy infrastructure in the region represent the key risks for the growth inflation mix.
• Geopolitical fragmentation. The US–China rivalry remains entrenched, while energy supply and global trade patterns continue to shift. 
• Fed dilemma. The oil shock and a divided FOMC could delay further easing, risking a pause in liquidity support. There is a risk that tariff-related price gains together with energy price related pressure, 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.

Cross asset strategy

• We are downgrading equities to neutral this week, with Europe and Japan – the largest energy importers – facing the sharpest headwind. This follows our downgrade of Emerging Market equities last week and reflects a further shift in our macro assessment.
  • Our overall positioning is Neutral, the single slightly positive stance being limited to the US.
• Regional allocation:
  • United States: Slight Overweight. The United States remain relatively more insulated thanks to domestic energy production and still-resilient private demand.
  • Japan: Downgrade to Neutral. Structural energy import dependence.
  • Europe: Downgrade to Neutral. Acute exposure to Middle Eastern oil and LNG dynamics and vulnerability to renewed headline inflation.
  • Emerging Markets: Neutral. The region was one of the best performers year-to-date, but in the new geopolitical environment it is also the most vulnerable to higher oil prices and a rising USD. 
• Factor and sector allocation:
  • We remain constructive for both Healthcare and Tech. Within the software sector, a large dispersion of business models exists, some of which are more impacted by Artificial General Intelligence than others. The whole sector has sold off indiscriminately, creating opportunities.
  • We keep some exposure to European Industrials as well as German and US small- and mid-caps as they are somewhat shielded from expansionary budgets and planned deregulation.
• Government bonds:
  • We are slightly long core European duration but have recently reduced the overall duration exposure. A spiking oil price, if it remains at elevated levels, will feed through in inflation and interest rate expectations for the ECB.
  • US Treasuries remain Neutral, with the upcoming Fed reshape adding complexity.
• Credit:
  • Spread widening in European Investment Grade has been limited, insufficient to create a broad valuation opportunity while macro uncertainty remains elevated. With yields higher but dispersion increasing, we favour maintaining selectivity rather than holding an overweight position.
  • Preference of European Investment Grade credit versus US Investment Grade credit and High Yield.
  • Emerging Market debt is an Overweight on attractive yields, better trade visibility, and high real interest rates.
• Alternatives:
  • Despite a marked increase in volatility, Gold remains a key conviction as a hedge against geopolitical risks and real rate volatility; supported by strong central bank buying and investor flows.
  • We retain allocations to alternative strategies for portfolio stability and diversification
• Currencies:
  • The current market regime favours currencies linked to commodities such as precious metals and oil. Therefore, we have long positions in AUD, NOK and BRL.
  • We remain underweight on the USD but have reduced this underweight materially on renewed geopolitical escalation.
  • We are also long JPY.

Our Positioning

Financial markets remain dominated by headlines and noise regarding the escalating Middle East conflict, which severely disrupted energy markets and fed volatility across asset classes. Oil prices repeatedly spiked above $100 per barrel on fears of prolonged Strait of Hormuz closures, damage to energy infrastructure and supply shocks. Short-term measures were taken such as freeing up oil reserves and temporarily lifting some US sanctions on Russian oil. Equities sold off and bond yields rose amid fading expectations of imminent rate cuts, while the dollar caught a bid. We have downgraded equities to neutral, with Europe and Japan – the largest energy importers – facing the sharpest headwind. This follows our downgrade of Emerging Market equities last week and reflects a further shift in our macro assessment. US policy objectives in the region remain uncertain. Washington has so far shown no urgency to bring energy prices down, with recent statements suggesting that short-term oil market disruption is seen as an acceptable cost. That said, a prolonged spike would carry domestic economic and political consequences – a factor that may increasingly weigh on decision-making. Until there is greater clarity on the conflict's trajectory and US strategic intentions, we prefer to reduce risk in the regions most directly exposed to an energy shock. In fixed income, we have reduced the overall duration and credit exposure. We remain constructive on metals.