Coffee Break

Last week in a nutshell

• ECB kept rates unchanged, noting growth risks are now “more balanced” thanks to fading trade uncertainty and resilient domestic demand, while declaring the disinflationary process “over”.
• US consumer sentiment fell again to 55.4 (lowest since May) on fears tariffs will squeeze purchasing power, while producer prices unexpectedly declined as firms appeared to absorb some of the import cost pressures.
• Japan’s PM Shigeru Ishiba resigned with an LDP leadership vote set for early October, France’s PM François Bayrou quit after a lost confidence vote, while Norway re-elected PM Jonas Gahr Støre.
• As the UN General Assembly called for unity, the EU readied a 19th sanctions package against Russia and NATO reinforced its eastern flank after a Russian drone incursion into Poland.

Investment convictions

Core scenario

• United States: GDP growth slowing to 1–2% with no recession expected; inflation facing upward pressure by tariffs, but the Fed appears willing to look-through and enters a new easing cycle, with markets pricing in several rate cuts over the coming 18 months.
• Europe: Growth resilience to be tested by the rise in US tariffs and political uncertainty in France. Bund yields are stabilising around 2.75% while the ECB preserves optionality to cut, supported by persistently low inflation expectations.
• China: Trade visibility improving somewhat, but frictions remain. External outlook supported by some tariff relief, while domestic policy remains accommodative through selective credit easing and fiscal support.  

Risks

• Fed independence at risk: The “Trumpification” of the Fed through 2026 threatens to rupture past practice, with a more politically driven reaction function. This could steepen the yield curve, raise inflation premia, weaken the US dollar, support nominal earnings in the short term, and ultimately trigger an unpredictable bond market sell-off… potentially requiring a quantitative easing.
• European political instability: Weak cohesion and fiscal fragmentation risk to weigh on the region. In France, renewed political tensions have resurfaced as Prime Minister François Bayrou lost a confidence vote, coinciding with nationwide strikes.
• Bond market credibility test: A loss of confidence in fiscal discipline could drive long-term yields higher, renew volatility, and destabilise equities and credit markets.
• Geopolitical and policy fragmentation: Ongoing conflicts in Ukraine and the Middle East pose risks to energy markets and global security, while diverging central bank paths and rising protectionism add to global policy fragmentation.

Cross asset strategy

• Global equities are supported by the start of a new Fed rate cut cycle, which has reduced uncertainty and tightened credit spreads.
• Global equities:
  • Positioning remains Neutral overall, with tactical upgrades in Japan and selective tilts in EMs given the latest developments.
• Regional allocation:
  • Japan is upgraded to Overweight: Trade visibility has improved, cyclical sectors (notably exporters) benefit from tariff relief, while structural reforms and upcoming elections point to fiscal stimulus and stronger corporate returns.
  • Europe remains Neutral: Tariff relief provides support, but French political risks and fiscal instability limit conviction. The ECB keeps optionality as low inflation leaves room for policy action.
  • United States stays Neutral: Growth is slowing but not collapsing; we maintain hedges with cheap volatility, mindful of the “Trumpification” risk at the Fed.
  • Emerging Markets: Equities remain Neutral overall, but EM debt has been upgraded to Slight Overweight as dovish Fed policy lowers funding costs, trade visibility improves, and yields remain attractive.
• Factor and sector allocation:
  • We continue to favour resilient themes such as Technology & AI, European Industrials, and German Midcaps.
  • We have added exposure to US small- and mid-caps, which benefit from lower financing costs under a dovish Fed.
  • Healthcare remains supported as most of the bad news now appear discounted in the prices.
• Government bonds:
  • We are constructive on core European duration, where stable ECB policy and low inflation expectations anchor yields.
  • We hold a Short OAT / Long Bund as a hedge to protect against tail-risk of a renewed French political instability in the face of slippery public finances.
  • 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 remains less attractive given tight spreads and limited risk premia.
  • Emerging Market debt is upgraded to slight 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 weaker USD; supported by strong central bank buying and retail flows.
  • 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 global economy approaches the final stretch of 2025 at an inflection point. Financial markets, unsettled for much of the year by tariff escalations and a slowing US economy, now find comfort in the start of a new Fed rate cut cycle. Further, an improved trade backdrop interacts positively with monetary policy: a dovish Fed and clearer trade conditions reduce volatility and encourage capital flows into regions previously shunned.

Better short-term visibility regarding the beginning of a new easing phase in global monetary policy, Fed reshaping, and progress on trade negotiations have reduced immediate tail risks and created an improved environment for select investment calls. In our view, two stand out as portfolio upgrades: Japanese equities and emerging market debt emerge as the clearest beneficiaries, each underpinned by structural and cyclical forces.

We express our equity convictions through an Overweight in Japan, where improving trade visibility, structural reforms, and the upcoming election campaign provide a strong backdrop. In the US, we have added to our mid and small-caps allocation which benefit from lower financing costs under a dovish Fed. In Europe, we emphasise Industrials and German mid-caps, while continuing to back resilient global themes such as Technology & AI and Healthcare. On the fixed income side, we have increased exposure to Emerging Market debt, supported by attractive yields, tariff relief, and improved investor flows. We are constructive on core-European duration, complemented by a Short OAT / Long Bund hedge against French political tail risk, while in credit we continue to prefer European Investment Grade over High Yield.