Our Asset Allocation
in Detail

DISCOVER OUR ASSET ALLOCATION IN DETAIL

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Equity Markets

Broadly positive on developed equities

Global equity markets started the year with short term weakness coincident with a sharp rise in bond yields. Announcements from the new Trump administration will continue to create volatility in the weeks ahead. However, economic fundamentals in the US remain sound and earnings growth remains high. Despite lacklustre activity, European markets could perform well also thanks to the cut in key rates and the ongoing rebound in earnings growth. Finally, we remain cautious on emerging markets due to the sluggishness of the Chinese economy and the risks of a trade war with the United States.

US. The US equity market was at the centre of recent weakness, partly due to the rise in long bond yields. Given the uncertainties surrounding economic policy, the high levels of valuation and the high degree of concentration in the market, volatility could persist.

These points of caution noted, we maintain a positive view given robust economic activity, historically high profit margins, and emerging pro-business policies (corporate tax cuts, deregulation, etc.).

Euro Area. In contrast to global markets, European equities have risen since the beginning of December, despite a rise in long-term bond yields similar to those in the United States. Technology stocks are the main contributors, followed by financials (rising yields) and the energy sector (rising commodity prices). This positive performance should continue, thanks to the prospect of rate cuts by the ECB, the fall in the euro and the market's attractive valuation. The upturn in household consumption, thanks to falling inflation and a rebound in purchasing power, should also play a favourable role. Finally, although earnings growth remains weak, it has shown some signs of improvement recently. We therefore also maintain a positive view on European equity markets but prefer sectors and companies less exposed to a prospective trade war.

UK. Thanks to improving performance of value stocks, UK stocks have held up better than global markets. UK equity markets could continue to perform well, benefiting from an attractive valuation level, the fall in key rates, and an improvement in earnings growth. The strong weighting in energy stocks in a context of rising commodity prices could also be supportive.

Japan. We keep a neutral outlook on Japanese equities, which should benefit from the end of deflation and the gradual exit from the zero-interest rate policy as well as improved corporate governance and solid earnings growth. However, the volatility of the yen and the high content of technology stocks could weigh on valuations.

Emerging Countries. Emerging markets have underperformed global markets due to the sluggishness of the Chinese economy, the prospects of higher US tariffs and the rise in long-term bond yields. We maintain a more cautious approach to these markets, as the prospects of new announcements of a Chinese economic recovery plan remain more distant than those on US customs duties.

Unless specified, all figures and statistics in this report are from Bloomberg and Macrobond on 29/01/2025 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

Geographical and segment differentiation

We remain broadly neutral on global bond markets, despite differences between the US and European markets. US sovereign yields are likely to remain volatile against a backdrop of resilient growth and changing inflation expectations. In Europe, yields are likely to fall as a result of more moderate growth and ongoing disinflation, allowing the ECB to continue its easing.

UK. UK yields also followed the upward trend in US yields. This rise, like those in the euro area, reflects more a contagion effect with US yields, as the economic recovery remains moderate, and inflation converges towards the BoE's 2% target.

The BoE is likely to continue its rate-cutting cycle (we expect up to 4 rate cuts in 2025). We therefore remain constructive on the gilts with moderate duration.

US. Since December, yields on Treasuries have been on a general upward trend against a backdrop of still robust growth and rising inflation expectations. This trend can be explained in part by the continuing strength of the economy, with a buoyant labour market and business surveys showing growth close to 2%. The recent movements in oil prices and rising inflation expectations also go some way to explain the rise, with markets fearing the inflationary impact of the Trump administration's trade and migration policies.

Euro Area. Bond yields in the euro area followed those of the US, with 10-year German and French yields trending higher from the beginning of December. While yields in the peripheral economies also rose, risk premiums remained stable for Italy and Spain.
The moves in Europe illustrate a contagion phenomenon with US yields. While European economic activity remains positive, it is not as dynamic as in the US, with sluggish growth - particularly in Germany. Moreover, euro area inflation is converging more quickly towards the central bank's 2% target, with French and Italian inflation already below this. Against this backdrop, the ECB cut its key rate to 3% at its December meeting, and we expect it to continue its cycle of interest rate cuts at future meetings. We therefore remain constructive on European sovereign bonds. Weak growth should lead to further disinflation, with long-term bond yields falling from attractive entry points.

Credit. The rise in sovereign bond yields has resulted in a sharp rise in US corporate bond yields, with the yield on Investment grade bonds at 5.3% and the yield on high-yield bonds at 7.3%. Yields remain attractive against a backdrop of healthy corporate balance sheets and dynamic economic growth, especially in the US. In Europe, corporate balance sheets remain healthy also, valuations are in line with their historical averages, and the carry remains attractive.

Currencies

The case for a strong dollar persists

We expect the US dollar to continue appreciating against the major developed and emerging currencies. The growth differential between the US and the rest of the world, and rising US inflation expectations versus continued disinflation elsewhere, should keep the interest rate differential high. In addition, the growing risk of trade tensions is also favourable to the dollar, with a rise in risk aversion for exporting economies.

Dollar Index. The dollar continued to appreciate versus major currencies in December against a backdrop of growth and interest rate differentials favourable to the dollar, and fears of trade tensions.

Regarding emerging market currencies, after a highly volatile November, the BRL contained its losses against the dollar thanks to significant intervention by the central bank on the currency market. However, downward pressure on the Brazilian currency remains amid fears over the country's budget path. The MXN has also fallen against the dollar, reflecting the risk of trade tensions at a time when over 80% of the country's exports go to the United States. In Asia, the CNY has depreciated against the dollar since the start of December amid trade tensions and the prospect of low interest rates in China.

EUR/USD. Amongst developed markets, the euro depreciated the most against the dollar. 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 the euro-dollar parity.

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 should benefit the Swiss currency, especially in an environment of major geopolitical risks. Secondly, the interest rate differential between Switzerland and the euro area should remain stable, in an environment where the Swiss National Bank is likely to continue its rate-cutting cycle (currently at 0.5%) due to inflation approaching 1%. Finally, Switzerland's large current account surplus (7% of GDP) should also support the local currency.

GPB/USD. We remain cautious on GBP/USD as the pound has continued to trend lower. Similar to the euro area, the United Kingdom could be affected by tariff hikes, given that the US is its biggest export market. Additionally, like the euro area, the interest rate differential between the US and UK is likely 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 & Commodities

A cautious stance

High interest rates and bond yields continue to temper our enthusiasm for alternatives.

Commodities and gold

Commodities. To mid-January, oil had been one of the best performing assets, having risen above $82/bbl from close to $70/bbl in December Prices were pushed higher by a colder-than-expected winter and new US sanctions on Russian oil. Nevertheless, the doubts about the rebound in Chinese activity and the production volumes from the United States should continue to limit rallies. We therefore keep a cautious view on oil. It should be noted that the gas price has also increased due to a cold winter and lower European gas stocks than in 2024.

Gold. Gold has made a positive start to the year after dropping slightly just after the US election which reinvigorated investors' appetite for risk. Trade tensions, (geo)political uncertainties and purchases by emerging central banks appear to be supporting the yellow metal. Despite offering no 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. 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.