Monthly House View
04.08.20265 min
Resilience under pressure
Although geopolitical tensions have progressively normalised over the past quarter, recent events are once again fuelling an environment of uncertainty, keeping interest rates under pressure and favouring a return of volatility to equity markets.
In this context of disruption, macroeconomic fundamentals demonstrate the resilience of developed economies, while the strength of the investment cycle linked to artificial intelligence (AI) continues to support equity markets.
Equities
Momentum illustrates the strength of the investment cycle
Since the beginning of the year, US equity markets have recorded significant gains, driven primarily by the technology sector and the semiconductor segment. This momentum illustrates the strength of the investment cycle linked to AI and the persistence of supply constraints in certain strategic segments.
While these factors underpin robust earnings prospects, the scale of the rally and the concentration of performance call for disciplined and selective management, as certain valuations already reflect pronounced optimism. Low summer liquidity, geopolitical tensions in the Middle East, and uncertainties surrounding the monetisation of AI represent short-term consolidation risks, which, in our view, could offer attractive entry points.
Earnings season likely to be decisive
Against this backdrop, the earnings season is set to be decisive and could act as a catalyst for a new upward phase, with the macroeconomic framework remaining broadly supportive.
Given solid fundamentals and earnings growth prospects, we therefore maintain a constructive view on US equities and AI-related themes, while favouring broad diversification, notably through small and mid-capitalisations. The latter, recently affected by the rise in real rates, should benefit from a resilient economy and potential stimulus measures in the run-up to the midterm elections.
Emerging markets: fundamentals remain solid
The concentration of performance is also evident in emerging markets, with South Korea and Taiwan appearing as the main Asian beneficiaries of the semiconductor cycle. However, this now highly targeted positioning by investors, combined with increased use of leverage, calls for caution in the short-term.
The appreciation of the dollar and climate risks linked to El Niño – particularly via food inflation and disruptions to supply chains in South-East Asia – could accentuate the dispersion of performance between countries. Nevertheless, the fundamentals of emerging markets remain solid, and any correction could represent an interesting entry opportunity for medium-term investors. Finally, certain Asian technology players, notably Chinese ones, also represent growth drivers within the emerging universe.
A more cautious stance towards the Euro Area
We continue to adopt a more cautious stance towards European equity markets, penalised by fragile and heterogeneous economic activity, persistent energy dependence on Gulf flows, as well as the possibility of a return of political risk in the second half of the year.
However, we maintain a positive view on certain segments such as the strategic autonomy theme (defence, supply chain security) as well as on undervalued stocks and the banking sector, the latter benefiting from a durably high-interest rate environment, a recovery in the mergers and acquisitions cycle, and attractive yields.
Fixed income and credit markets
The bond market continues to be influenced by the evolution of inflation as well as the direction of monetary and fiscal policies. In this context, our prudent positioning, characterised by an underweight sensitivity to rates, still appears appropriate. However, the recent rise in rates, resulting from an adjustment in expectations regarding policy rates, could generate tactical opportunities to strengthen our exposures.
Preference for short maturities in the Euro Area
We thus continue to favour short maturities in the Euro Area, while long maturities remain more volatile and exposed to uncertainties surrounding fiscal policy and the political context through to year-end. In the United States, our positioning remains unchanged. However, the elevated level of real rates, close to their highest levels in twenty years, is beginning to render government bonds attractive. It should nevertheless be noted that the robustness of the investment cycle, driven by the rise of AI, potentially supports the upward trend in real rates.
Absolute yields remain attractive
Moreover, we retain a positive view on high-quality credit in the Euro Area. Despite a tightening of spreads, absolute yields remain attractive, supported by robust fundamentals and persistent demand from yield-seeking investors. Conversely, we remain more reserved on US credit, where the increase in issuance, notably by "hyperscalers", calls for caution.
Finally, we remain positive on emerging market debt in local currencies, which offers attractive diversification potential thanks to high real rates and a more stable macroeconomic environment.
Currencies
We maintain a cautious approach towards the US dollar. Its recent support reflects both its status as a safe haven, the repositioning of expectations for US monetary policy, and the restoration of the perceived credibility of the Federal Reserve (Fed).
Likely headwinds for the dollar in the medium term
Nevertheless, this strengthening does not call into question our medium-term view: as US inflation moderates and the market prices in a less restrictive monetary trajectory, the dollar could face increasing headwinds. Lastly, the gradual diversification of foreign exchange reserves and international allocations away from dollar-denominated assets remains, in our view, a structural factor of vulnerability for the greenback.
Constructive stance on gold
We also remain constructive on gold. The yellow metal has recently had to contend with the rebound in the dollar and the adjustment of expectations for US rates, but these short-term factors do not undermine the strength of its fundamental drivers.
Gold continues to be supported by the diversification of central bank reserves, persistent geopolitical tensions, and the high level of public debt in developed economies. The resumption of Chinese purchases also reinforces this underlying trend, providing tangible support to demand and helping to anchor prices at durably high levels.
