Coffee Break

Last week in a nutshell

• The latest barrage of US data releases showed that employment and retail sales held up better than anticipated.
• November US inflation came in below expectations but the inflation print was clearly downward biased and poorly measured due to the government shutdown.
• Following an unanimous vote, the BOJ announced its widely expected policy rate hike from “around 0.5%” to “around 0.75%”.
• In Europe, the Bank of England cut its reference rate to 3.75% while the ECB kept its deposit facility rate at 2.0%.
• Flash PMIs for December in the US and the euro zone were a bit softer than expected while UK PMI picked up as budget-related uncertainty eased.

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 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. 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.

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 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 an exposure to 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 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 latest barrage of US data releases showed that employment and retail sales held up better than anticipated while November inflation came in below expectations. The inflation print was clearly downward biased and poorly measured due to the government shutdown. Looking ahead, there is a risk that tariff-related price gains – which have so far not had a meaningful impact on consumer prices – together with the reversal of these downward biases, could lead to some inflation increases over the coming months. Separately, this week’s central bank decisions in Europe and Asia continued to steepen global yield curves. 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 and European Industrials 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.