Monthly House Views - Towards a new balance

A lull in trade tensions
The de-escalation of tariffs between China and the United States raises hopes of avoiding a full-blown trade war and reduces the likelihood of a sharp recession scenario. This lull has allowed a sharp decline in the turbulence on the financial markets. However, the actual increase in US tariffs remains significant and will continue to weigh on the balance of world trade. This increase in tariffs represents a negative supply shock for the US economy and will imply a slowdown in its activity and further pressure on inflation. For the other regions, the increase in US tariffs represents a negative shock to their external demand, allowing an easier response from economic policies (fiscal and monetary policies). Thus, Europe appears more protected, with the support of its central bank and the recently announced plans (Rearm Europe and the German plan). China would also be penalised, but the authorities would also limit the impact by accelerating fiscal stimulus while the central bank will maintain accommodative monetary conditions.
 
Towards a balanced strategic position
The reduced probability of a scenario of a sharp recession in the United States encourages us to adopt a more balanced strategic stance. In particular, we are moving to "balance" on the US equity markets, while remaining negative on the dollar and on the US sovereign bond markets, in a context of inflationary risk. We are also reducing our exposure to gold to secure the gains made in recent months and to favour vehicles offering carry
 
And still a clear overweight in Europe
We maintain our overweight position in European equity markets, which continue to benefit from important support factors: a favourable rebound in peripheral economies, monetary and fiscal support, as well as valuations that remain attractive. We are also increasing our exposure to European credit markets, both good and low rated (ie. Investment Grade and High Yield) which benefit from both these support factors and attractive carry.

Read full article