Our Asset Allocation
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DISCOVER OUR ASSET ALLOCATION IN DETAIL

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Equity Markets

Broadly positive on developed equities

Despite the uncertainties surrounding the Trump administration's tariff policy, global equity markets have rallied since the start of the year. Economic growth remains solid in the United States, and the earning season is pointing to continued strong US corporate earnings and an improvement in Europe. We are increasing our positive stance on European equity markets in order to benefit from the positive momentum. We continue to favour US equities. Despite the good start to the year for Chinese equities, we remain cautious on emerging countries, which remain particularly vulnerable to trade tensions.

US. The US equity market underperformed global markets last month (and since the end of 2024). This can be explained by uncertainties over economic policy (tariffs and the Fed), high valuation levels and the poorer performance of the Magnificent 7. Nevertheless, solid US economic growth and historically high profit margins should continue to support the equity market.

Corporate earnings for Q4 2024 illustrated this point, with earnings both ahead of expectations and still growing strongly - which is true in both cases in most sectors. The prospects of corporate tax cuts and deregulation could also work in favour of the US market. We are maintaining a balanced position on styles.

Euro Area. European equities is one of the star markets at the start of the year, rising by more than 11% since the end of 2024, despite persistently sluggish economic growth. There are several reasons for this strong performance. Firstly, underperformance over the last two years and relatively cheap valuations have attracted some investors. Secondly, the rate cut cycle and the fall in the euro supported the markets. In addition, the prospect of a rebound in activity following the German elections and the possibility of a resolution (albeit partial) to the Ukrainian conflict may have played a role. Finally, Q4 corporate earnings showed a slight improvement, particularly in the industrial, communications and banking sectors. In our view, these supportive factors should continue, encouraging new investors to return to European equity markets.

UK. In line with its European peers, the UK equity markets performed strongly last month and since the end of 2024. The market's attractive valuation, low exposure to the domestic economy (and the risks of recession) and the move to lower key interest rates (and hence the depreciation of sterling) explain this trend. In addition, local corporate earnings growth has rebounded sharply.

Japan. The Japanese equity market has performed well over the past month. We keep a neutral outlook on this market. On the one hand, improved corporate governance (larger shareholders payout), strong earnings growth and the end of deflation should support the market. On the other, the Bank of Japan's gradual normalisation (raising short rates and lifting the ceiling on long bond yields) and the expected appreciation of the yen could weigh on prices, as a large proportion of Japanese companies' profits are made abroad.

Emerging Countries. Thanks to the surge in the Chinese market, emerging markets have performed strongly over the past month. As in Europe, attractive valuations combined with relative underperformance in the past have helped these markets. Nevertheless, we maintain a more cautious approach to these markets, which are among the most vulnerable to possible announcements of new US tariffs. The persistent sluggishness of the Chinese economy (property market in particular) also prompts us to remain cautious.

Unless specified, all figures and statistics in this report are from Bloomberg and Macrobond on 28/02/2025 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

Broadly neutral

We are maintaining a balanced position on bonds. US yields are likely to remain under pressure as disinflation slows and inflation expectations rise due to trade tensions. In Europe, long-term yields are likely to continue their downward trend, against a backdrop of ongoing disinflation and the ECB's rate-cutting cycle. We have also a neutral view credit, which benefits from an attractive carry and solid companies’ balance sheets.

UK. UK yields followed the trend in the euro area, with the 10-year GILTS yield falling to 4.5% as the economic recovery remained moderate and inflation converged towards the BoE's 2% target. The BoE is expected to continue its rate-cutting cycle (we expect up to 3 further rate cuts in 2025). We therefore keep a neutral approach on the GILTS market.

US. US sovereign yields remain at high levels against a backdrop of solid growth and rising inflationary uncertainty. The 2-year Treasuries rate, a proxy for expectations of the Fed’s rate at the 1-year horizon, has above 4%. The 10-year Treasuries rate dropped to 4.25%. These bond yields levels are explained in the first place by activity that remains very solid, with growth expected to remain above 2% this first quarter and the labour market still robust. Secondly, the pace of disinflation has slowed significantly in recent months, with underlying inflation stabilising at 3.3% year-on-year. Finally, inflation expectations have risen against a backdrop of tariff hikes and a very restrictive migration policy. The combination of these three factors has led the Federal Reserve to maintain its key rate at 4.5%, and we believe that the institution will maintain a very cautious tone, with only one rate cut expected in 2025.

Euro Area. European bond yields fell by less than that of the US over the last month. The 10-year Bund rate dropped to 2.4% and is back to beginning of the year level. As political uncertainties have diminished, French bond yields spreads narrowed . Risk premiums in peripheral economies have continued to fall, with the Italian spread narrowing to 106bp and the Spanish to 61bp. This divergence from US rates is explained by a less dynamic growth dynamic, with activity in Germany continuing to stagnate and modest growth in France. Only Spain is showing robust growth among the major economies of the euro area. In addition, disinflation continues, with underlying inflation already below the 2% target in France and Italy, and momentum in line with this target in Germany and Spain. Against this backdrop, the ECB has continued its rate-cutting cycle, reducing the deposit rate to 2.75%, and we expect further easing towards a terminal rate of 2%. We therefore keep a neutral stance on the euro sovereign bond yields market.

Credit. We keep a neutral stance on the investment-grade corporate bond market (IG). Yields remain attractive at 3.4%, while corporate balance sheets remain solid, and their profitability would benefit from the ECB rate cut. Furthermore, the risk premiums on these bonds remain in line with their historical averages, and they are not very sensitive to the risk of trade tensions, given the sector composition of the IG bond universe (banks in particular).

We keep a neutral stance on the US and European speculative grade (HY) bond markets. The yield on the US HY index is 7.3%, while the yield on the European index is 5.6%, offering an attractive carry with low duration risk.

Currencies

The bull case for the dollar remains

We expect the US dollar to continue appreciating against the main European and emerging currencies. The growth differential between the US and the rest of the world and rising US inflation expectations, in contrast to continued disinflation elsewhere, should keep the interest rate differential high and support the US currency. In addition, the growing risk of trade tensions also remains favourable to the dollar, with a rise in risk aversion for export economies. We are, however, moving to a more constructive stance on the yen, due to further monetary tightening by the Bank of Japan.

Dollar Index. The US dollar has fallen over the past 4 weeks against the main emerging and developed currencies. In Latin America, the CLP was the currency that appreciated the most against the dollar, on the back of rising copper prices.

The BRL also recovered some of its losses, as Brazil's central bank raised its key rate from 12.25% to 13.25%. In Asia, the main currencies recorded modest gains against the dollar, with the CNY and KRW appreciating only slightly. For the time being, these movements reflect a lessening of fears about trade tensions, with Asian economies outside China not being directly targeted by the rise in customs duties.

EUR/USD. The euro remained relatively stable against the US dollar. The EUR/USD exchange rate remains at around $1.04 per euro. This stability is mainly because the threat of increased customs duties by the United States does not affect European exports, apart from steel. However, we remain underweight the euro-dollar exchange rate. On the one hand, the divergence in monetary policies between the ECB and the Fed is favourable for the dollar. On the other hand, the significant growth differential and the continuing threat of tariff hikes are also favourable for the dollar.

GPB/USD. We remain cautious on GBP/USD. The British currency has appreciated moderately towards a parity of $1.26 per pound. The United Kingdom could also be affected by tariff hikes in the United States, given that the American market is its biggest export market.

EUR/CHF. The Swiss franc remains at a historically high level against the euro. We remain cautious on this parity. Firstly, political uncertainty in Europe would benefit the Swiss currency, especially in an environment of major geopolitical risks. However, the Swiss National Bank (SNB) is expected to follow the ECB's rate-cutting cycle, against a backdrop where headline inflation in January came in at just 0.4% year-on-year and core inflation at 1%, well below the SNB's target. Finally, Switzerland's large current account surplus (7% of GDP) remains a structural support for the local currency.

Furthermore, like the euro area, the interest rate differential between the United States and the United Kingdom is likely to widen in favour of the dollar.

USD/JPY. The yen halted its downward trend against the dollar, to reach a parity of 150 yen to the dollar. Like the euro and Sterling, the absence of any significant measures against Japanese exports has enabled the yen to rise against the dollar. Furthermore, unlike the ECB or the BoE, we expect the Bank of Japan (BoJ) to gradually continue its monetary tightening cycle. The BoJ raised its key rate from 0.25% to 0.50% in January, against a backdrop in which total and core inflation are showing signs of stabilisation around the 2% target. Headline inflation rose significantly to 3.7% year-on-year in January under the pressure of rising food prices. Core inflation has been stable at 1.6% year-on-year since July 2024. We therefore believe that the BoJ should continue its cycle of gradual interest rate tightening, with the key rate expected to be 0.75% at the end of the year, supporting the yen. We have therefore moved to a more cautious stance on the dollar/yen exchange rate.

Alternatives & Thematics

Cautious on hedge funds; neutral stance on gold and industrial metals

High interest rates continue to make hedge funds less attractive. Uncertainties continue to favour gold. We have moved to a neutral stance on industrial metals.

Commodities and gold

Commodities. Over the past month, oil prices has posted a clearly bearish performance, falling back to its levels at the start of the year (around $75). President Trump's call for a price cut to curb inflation, the attitude of OPEC+ members, doubts about the rebound in Chinese activity and the rise in US crude stocks have weighed on the oil price, on which we remain underweight. After continuing to rise, given the cold winter and low European inventories, gas prices have dropped below their beginning of the year levels thanks to hopes of peace in Ukraine. We are moving to a neutral stance on industrial metals, whose momentum would benefit from the recent rebound in the manufacturing sector indicators and the tariffs on steel and aluminium.

Gold. Gold has had a very positive start to the year, ranking among the best-performing assets (+9% since the end of 2024). Given the uncertainties surrounding US economic policy and geopolitical risks, gold’s safe-haven status continues to attract investors. In addition, purchases by central banks in emerging countries continue to support gold. So, despite its lack of yield, we keep a neutral stance on gold.

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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. M&A transactions continue to suffer from the high level of interest rates and the drying up of liquidity. As a result, funds in this category appear unattractive

Fixed Income Arbitrage. Some funds positioned in sovereign bonds could benefit from higher interest rates. We continue to show a relative interest in funds positioned on the credit segment.

Global Macro/CTA. Commodity Trading Advisors (CTA) funds are generally useful for hedging against market volatility. However, given their recent performance, we do not believe they are sufficiently attractive.