Our Asset Allocation
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DISCOVER OUR ASSET ALLOCATION IN DETAIL

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Equity Markets

Broadly positive on developed equities

Equity markets, particularly in the US, have performed strongly since Trump's election. Although there are many uncertainties regarding the timing and scope of the new Trump administration's economic policies, the prospects for corporate tax cuts and deregulation should continue to support the US markets, as well as European companies and sectors exposed to the US economy. On the other hand, there are risks for emerging equity markets, with China especially vulnerable to an escalating trade war.

US. The US equity markets welcomed the election, rallying by 5.7% since 5 November. This good performance is part of an uptrend that has been observed for more than a year, with stocks up 28.5% since the start of the year. We expect the Trump trade to continue over the coming weeks. The US equity markets will continue to benefit from the resilience of the US economy, buoyant corporate earnings growth and the prospects of corporate tax cuts, deregulation, and national industrial policy.

Despite the high valuation levels, the high concentration of performance in a few companies, and the inflationary risks posed by trade policy, we keep a positive view on this market. We favour sectors and styles that would benefit from favourable industrial policy and that would withstand the higher interest rate environment, in particular value stocks, mid-caps, and sectors such as manufacturing, finance, and healthcare.

Euro Area. European equities had a more mixed performance (+1.7% since the US election), but growth stocks rose sharply. In the weeks ahead, euro area equities could continue to benefit, albeit to a lesser extent than in the US. They should also be supported by the improvement in monetary conditions (a fall in the euro and the prospect of rate cuts). Moreover, we expect household consumption to rebound in the months ahead, with falling inflation boosting households’ purchasing power. Finally, euro area equity market valuations remain attractive compared with the US. We therefore maintain a positive view on European equity markets but choosing sectors or companies that would not suffer from tariff hikes, such as the media, industry, and materials, and favouring companies that produce locally. However, we remain rather defensive and diversified, favouring large caps, in particular.

UK. Since Trump's election, UK equities have performed better than their euro area counterparts, but not as well as their US counterparts (2.5%). Given UK stocks’ high exposures to the US, the UK market rally should continue. The recent fall in the value of sterling and the - albeit gradual - rate cuts by the Bank of England will also be supportive factors. Moreover, the UK economy appears resilient, much more so than that of the euro area. Finally, as in the euro area, valuations on UK equities as a whole still appear attractive and as such we maintain a broadly positive outlook.

Japan. The Japanese equity market has slightly underperformed global markets since Trump's election (+2.8% vs. 3.6%) and since the start of the year (18% versus 22%). The past depreciation of the yen, improved corporate governance, and solid growth in corporate earnings should continue to support the Japanese market. Nevertheless, the volatility of the yen and the high proportion of technology stocks may continue to weigh on the market. We therefore keep a neutral outlook on Japan equities.

Emerging markets. Emerging markets have performed negatively since Trump's election, penalised by the prospect of increased US tariffs and a sluggish Chinese economy. We are therefore taking a more cautious approach to these markets, albeit with an eye for important variations within.

Unless specified, all figures and statistics in this report are from Bloomberg and Macrobond on 10/12/2024 publication completion date. Past performance does not prejudge future performance. Investments may be subject to market fluctuations, and the price and value of investments and the resulting revenues may fluctuate downward and upward. Your capital is not protected, and original investments may not be recovered.

Fixed Income Markets

Maintaining neutrality and differentiation

Overall, we remain neutral on bond markets, with a difference between the US and European markets. US yields are likely to remain volatile against a backdrop of resilient growth, slowing disinflation and rising inflation expectations. In Europe, rates are likely to fall against a backdrop of slower growth but still-present disinflation, allowing the ECB to continue its rate-cutting cycle. In this environment, we are maintaining a positive stance on investment grade corporate debt.

UK. UK rates also had a volatile month, with the 10-year gilt yield falling from 4.6% at the beginning of November to 4.2% at the beginning of December. The trend of disinflation is also losing momentum in the United Kingdom, with core inflation around 3.3% in recent months.

In addition, economic activity also remains resilient, with domestic demand accelerating and growth expected to increase in 2025. Against this backdrop, the Bank of England is expected to keep its key interest rate at 4.75% at the December meeting, and we expect the BoE to make 4 cuts of 25 bps in 2025. We therefore remain constructive on gilts market, with a preference for duration.

US. Volatility remains high in the Treasuries market, with growth remaining solid, disinflation slowing, and inflation expectations rising. The 2-year Treasury rate, a proxy for expectations of the Federal Reserve's rate in 1 year, rose to 4.4% in November before falling back to 4.1% in early December. The 10-year Treasuries rate followed the same pattern, reaching a level of 4.2%. Activity data for Q4-24 show that growth remains close to 2%, with a resilient labour market keeping interest rates above 4%.Furthermore, disinflation has slowed, with core inflation (the core private consumption deflator, the Fed's preferred measure) at 2.8% year-over-year in October. Lastly, there is the risk of higher inflation in 2025 against the backdrop of a likely rise in tariffs, a potentially more restrictive migration policy, and the continuation of the expansionary fiscal policy envisaged in Mr Trump's programme. The Fed is expected to cut its key rate to 4.5% in December and to maintain a more cautious stance in view of these dynamics. We are therefore cautious on US Treasuries.

Euro Area. In contrast to the trend in US yields, sovereign yields in the euro area fell sharply in November. The 10-year German Bund rate fell from 2.4% to 2% during this period, its lowest level in 2024. The rate on the French 10-year OAT also fell from 3.2% to 2.9% in November, but its risk premium rose to 87 bp, its highest level since 2012, against a backdrop of political uncertainty in France. However, the risk premium for peripheral economies continued to fall, with Italy's risk premium reaching 120 bp, its lowest level since 2021. The downward trend in euro area interest rates reflects, firstly, the still gloomy growth outlook, particularly in Germany and France. Secondly, disinflation is continuing, with November inflation showing faster convergence towards the 2% target, including services inflation. As a result, the ECB is set to continue its cycle of interest rate cuts, reducing the key interest rate to 3% in December, while we expect a further 4 cuts in 2025. We therefore remain constructive, with a preference for long duration, taking advantage of the prospects of lower bond yields.

CREDIT

We keep a positive view on European investment grade credit markets. This asset class continues to perform well, with a reduction in risk premia to 107bps, illustrating strong balance sheets while lower interest rates should support debt refinancing. We maintain a neutral stance on high-yield bonds, benefiting from attractive yields and low duration risk.

Currencies

The case for a strong dollar still exists

We expect the US dollar to remain strong against the major developed and emerging currencies. The growth differential between the US and the rest of the world, and the rise in US inflation expectations against further disinflation elsewhere, should keep the interest rate differential high, thus supporting the US currency. In addition, the growing risk of trade tensions is also favourable to the dollar, with an increase in risk aversion for exporting economies.

Dollar Index. The dollar appreciated sharply against major currencies in November against a backdrop of a growth differential and interest rates favourable to the dollar as well as fears over trade tensions.

In Latin America, the BRL was the currency that recorded the largest depreciation against the dollar, falling by 4.6%, due to expectations of higher dollar interest rates but also market fears about the trajectory of public finances in the context of budget discussions. The MXN also fell against the dollar, 1.8% in November, reflecting the risk of trade tensions as more than 80% of the country's exports go to the United States. In Asia, the CNY depreciated 2.1% against the dollar amid trade tensions and the prospect of low interest rates in China.

EUR/USD. The euro was the developed currency that depreciated the most against the dollar. Indeed, EUR/USD fell to 1.05 dollars per euro, a decrease of around 3%. This decline is explained primarily by the risk of higher customs duties on manufactured products, as several countries in the euro area have the United States as their leading trading partner outside the euro area and several countries also remain dependent on exports as an engine of growth. Secondly, the prospects of a wider interest rate differential between the two regions due to different growth and inflation dynamics favour the dollar against the euro. In this context, we keep a cautious outlook on euro-dollar parity.

EUR/CHF. The Swiss franc remains at a historically high level against the euro, trading at c. 0.93 per euro. We remain cautious on this cross. Firstly, political uncertainties in Europe should benefit the Swiss currency, especially in an environment of significant geopolitical risks. Secondly, the interest rate differential between Switzerland and the euro area is expected to remain stable, in an environment where the Swiss National Bank is expected to continue its rate cut cycle (currently at 1%) due to inflation close to 1%. Finally, Switzerland's high current account surplus (7% of GDP) would also support the local currency.

GPB/USD. We are similarly cautious on our outlook for GBP versus USD. Sterling fell 1.9% to $1.27. The United Kingdom could also be affected by an increase in customs duties in the United States, as the US market represents its largest export market. In addition, like the euro area, the interest rate differential between the United States and the United Kingdom is expected to widen in favour of the dollar.

USD/JPY. In contrast to other developed currencies but also to its trend for the year, the yen appreciated against the dollar during the month of November. The yen ended the month at 149 per dollar, an appreciation of 1.2%. This mainly reflects market reassessments of the Bank of Japan's (BoJ) monetary policy path. October inflation data, with services inflation at 2%, increased agents' expectations for the pace of the BoJ's normalisation. Markets now expect the BoJ’s key interest rate will be 0.7% at the end of 2025 compared to 0.5% at the beginning of November. However, we keep a cautious stance on USD/JPY. Firstly, inflationary pressures remain contained, with core inflation still below 2% and slightly positive real wage growth after years of contraction. Secondly, the tightening of monetary policy should be gradual, after several years of unconventional policies.

Alternatives & Thematics

Underweight on hedge funds; neutral on gold

High interest rates continue to make hedge funds less attractive, while uncertainty continues to favour gold. In terms of themes, we remain exposed to Artificial Intelligence and European Excellence, as well as to reshoring and innovation in healthcare, and are proposing solutions to play the economic slowdown and interest rate cuts.

Commodities and gold

Commodities. Oil continues its downward trajectory after peaking at $90 per barrel last April. Brent was trading between $71.50 and $75.50 this month. Geopolitical uncertainties as well as investor’s expectations of the Chinese stimulus plan (1st oil importer) are affecting this market. In this context, OPEC+ is expected to postpone the increase in its production (initially planned for early December) again so as not to strain an already strongly downward market.

Gold. The price of gold has declined slightly since Trump's election, after reaching an all-time high by the end of October at $2785. This downward trend is probably linked – at least in part – to the rise in US interest rates. Despite this slight pullback and the fact that it is a non-yielding asset, gold remains a diversifier, especially as geopolitical uncertainties could continue to support gold given its safe-haven status. We therefore keep a neutral stance on this asset.

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HEDGE FUNDS

Long/Short Equity. Funds in this category following a non-directional strategy could benefit from the current market environment (volatility and dispersion) and positioning in the economic cycle.

Event Driven. High interest rates and a shortage of liquidity continue to discourage firms from embarking on mergers and acquisitions. However, they ultimately stand to benefit from lower interest rates and a more laissez-faire approach to mergers in the US under Trump.

Fixed Income Arbitrage. Some sovereign bond funds could benefit from higher interest rates. We retain our relative interest in funds positioned in the credits segment.

Global Macro/CTA. Commodity Trading Advisors (CTAs) funds are generally useful for protecting against market volatility, however, will typically suffer under sharp reversals in markets.

Themes

We believe Artificial Intelligence stocks will continue to perform well, given the maturity and potential of AI and the strong profit growth of companies in the sector. The Reshoring theme should get a boost as industrial policy comes back into fashion. To cash in on a combination of bullish factors – falling inflation, cuts to ECB rates and attractive value – we are playing the European Excellence theme via international companies that are leaders in their respective markets. Finally, Health Innovation should benefit from an ageing population, changing lifestyles, technological progress and cheap valuations.

The combination of a slowing economy and falling policy rates should be good for strategies that focus on value and defensive sectors rather than growth stocks. High-dividend stocks also stand to gain, particularly those with an established track record of dividend yield payments. Safe-havens that are undervalued as well as fixed-income assets are other potential winners from the downward leg of the rate cycle.