Coffee Break

Last week in a nutshell

• Manufacturing data remained very resilient in both the US and the euro zone, confirming the strong capex impulse.
• Services PMIs in Europe still pointed towards a slowdown whereas in the US they remain in expansion.
• Based on corporate earnings calls and new AI issuance with large tech companies, investors questioned AI capital intensity again, causing some tech names to consolidate.
• The labour market in the US (JOLTS, ADP, NFP) remained very strong last week, putting upward pressure on interest rate expectations.

Investment convictions

Core scenario

• Slight overweight Equities: With negotiations ongoing and a ceasefire in place and lengthened, there’s room for markets to relax while the ongoing closure of the Strait is lifting producer and consumer prices.
• Monitoring the situation in the Middle East closely. We are ready to adjust our positioning as medium-term oil prices and bond yield pressures evolve.
• Since the start of the Iran war, no macro fallout in the US. Macro conditions remain supportive in the US and are no longer the dominant driver of market leadership. US growth continued to rest on private domestic demand, with investment – especially AI-related capex – playing a larger role than consumption.
• Back to fundamentals. Markets have shifted attention back to corporate profit growth as earnings are on a solid footing thanks to upgraded earnings expectations, led by Technology, Energy and Basic Materials.
• Monetary policy ambiguity. A Federal Reserve easing under its new Chair seems conditional on the evolution of energy prices – we think the Federal Reserve is likely to look through the shock, unless labour market dynamics stay increasingly strong. The ECB will have to manage inflation expectations, signalling a potential imminent rate hike this month. 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, notably for energy-importing countries.
• Geopolitical fragmentation. The US–China rivalry remains entrenched, while energy supply and global trade patterns continue to shift. US President Trump’s recent visit to China did not produce any meaningful positive surprise.
• Fed dilemma. The oil shock and a divided FOMC could delay further easing, risking a pause in liquidity support. There is a risk that 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 slightly overweight on equities via regional upgrades of US and EM.
• Regional allocation:
  • Slight overweight United States. The US remain relatively more insulated from the negative impacts of the war in Iran thanks to domestic energy production and still-resilient private demand, fuelled by the AI investment boom. We view the US in a relative better place, with a potential Fed easing, positive pricing power, AI fast adoption, and business de-regulation. Positive EPS growth revisions represent a support for the stock market.
  • Neutral Japan. The country faces structural energy import dependence, but a supportive government and BoJ policy.
  • Neutral Europe. The region suffers acute exposure to Middle Eastern oil prices and LNG dynamics and vulnerability to renewed headline inflation. On the other hand, fiscal spending in Germany is kicking into full gear.
  • Slight overweight Emerging markets. A selective approach within the region is warranted, but the overall strong exposure to Tech is a supportive factor. We prefer Korea, Taiwan, and China Tech to India. Valuation is attractive as the relative 12m forward PE of the MSCI Emerging Markets index reveals a 33% discount to the MSCI World index.
• Factor and sector allocation:
  • We remain constructive for both Technology and Healthcare. Within the software sector, a large dispersion of business models exists, some of which are more impacted by Artificial Intelligence than others.
  • We keep exposure to EU and US mid-caps and industrial stocks as they are somewhat shielded from expansionary budgets and planned deregulation.
• Government bonds:
  • We are long Core European Bonds duration. The Iran war has led to an inflation-driven repricing, as energy and supply disruptions lift inflation expectations. As consequence, ECB central bank easing expectations from the start of the year have been reversed and gone too far in our view: we expect +2 hikes of 25bp each from the ECB whereas the market is positioned for a more aggressive stance. We focus on high quality, core-European AAA-rated sovereign bonds, which enjoy both fiscal and central bank credibility.
  • We’re slightly short US Treasuries. Strong growth dynamics, AI Capex and an inflationary impulse, as well as deficit concerns, put upward pressure on US rates.
• Credit:
  • Spread widening in European Investment Grade has been very limited, insufficient to create a broad valuation opportunity while macro uncertainty remains elevated. Investment Grade fundamentals remain solid, but sensitivity to higher rates warrants a neutral positioning. For the moment, we favour maintaining selectivity rather than holding an overweight position.
  • Neutral on Investment Grade credit in both the US and Europe. High Yield technicals are deteriorating amid outflows and increasing supply. Within High Yield we’re neutral on Europe and negative on the US.
  • We upgrade 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. Also, EM FX appears best placed to benefit from renewed potential USD weakness. In addition, the current Yield-to-Maturity of ca. 7% represents an attractive carry for this income-diversifier position.
• Alternatives:
  • We remain constructive on gold over the long 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 such as precious metals and oil. Therefore, we have long positions in AUD, NOK and BRL.
  • There is an increased potential of a better relationship with the EU for Hungary which could lead to more stable policies and therefore a meaningful reduction of risk for foreign investors, leading us to hold a position in the Hungarian Forint.
  • We remain underweight on the USD but have reduced this underweight materially on renewed geopolitical escalation.
  • We are also long JPY.

Our Positioning

Our positioning remains moderately constructive, with a slight overweight in equities through the United States and Emerging Markets, where earnings momentum remains strongest. In fixed income, we favour Emerging Market debt and are constructive on core European duration vis-à-vis US duration. Within credit, we prefer European Investment Grade over High Yield, where risk premia remain limited. We maintain a preference for the Japanese yen, selected emerging-market currencies and commodity-linked currencies such as AUD, NOK and BRL. 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.