PERSPECTIVES
MARKET AND ALLOCATION
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OUR CENTRAL SCENARIO
Deputy Chief Executive Officer,
Chief Investment Officer
OFI INVEST ASSET MANAGEMENT
Make Europe Great Again?
In invading Ukraine in February 2022, Vladimir Poutine shook Europe out of its comfort zone. And now it’s Donald Trump’s turn to administer a shock the likes of which haven’t been seen since 2012. First, Ursula Von der Leyen announced an €800 billion EU defence plan. Then Germany – even before a new CDU/SPD government is in place – delivered an even bigger surprise with a 10-year €500 billion defence and infrastructure spending plan, made possible by throwing off its 0.35%(1) constitutional debt brake with votes from the previous parlement! The extent and speed of Europe’s reaction to the new geopolitical stance of the United States, which has switched from being an ally to a mere trade partner, has injected renewed energy to a continent that seems to want to grab hold of its destiny.
European markets reacted vigorously and probably excessively at first. Long-term German bond yields surged by 40 basis points, while a basket of defence stocks has gained 65% on the year to date. Volatility will remain high, as will uncertainties in the coming weeks, as tariffs have not yet been renegotiated between Europe and the US.
But in reaction to this new paradigm, we will be buying on any dip to add to our weighting of European equities for the medium term, based on the path already traced.
On the central bank front, visibility remains low on the US Federal Reserve’s intentions. We still expect it to lower its key rates twice this year but not in the short term. That being said, some consumer confidence indictors have stalled, thereby raising fears of a risk to growth. The 10-year US yield priced this in with a 25 bps decline in February. We now believe the risk is shifting from an inflation-shy Fed taking its foot off the monetary policy accelerator and towards a Fed having to take greater action to support growth.
Meanwhile, the European Central Bank (ECB) has lowered its key rates by 0.25%, as expected, and should continue to ease its monetary policy in the coming months. However, the recent announcements are likely to make it think twice, in particular on whether to stick to quantitative tightening(2). German long-term yields and, hence European yields, are likely to trade in a wider range than previously with the increase in the term premium. However, we believe that in the short term the current tension offers a tactical entry point and are therefore raising our weighting on euro sovereign bonds.
(2) The ECB’s quantitative tightening is a monetary policy aiming to reduce liquidity in circulation by lowering reinvestment of maturing assets.
OUR VIEWS AS OF 10/03/2025
US growth concerns and European stimulus announcements triggered a spike in European yields in early March, as well as a re-convergence of market expectations on the future trend of Fed and ECB monetary policies. Like the market in general, we were surprised by the extent and speed of the German stimulus plan, which has been announced but not yet confirmed. That being said, this is a major change in paradigm, and we now expect bond yields to trade at higher levels on a sustained basis. But we believe this rebound is a new opportunity to add duration to portfolios. We therefore reiterate our weightings in all fixed-income asset classes and are raising our weighting of euro zone sovereign bonds. In corporate bonds, momentum remains solid. There do exist risks of a widening in spreads, but carry offers protection that in our view makes it worthwhile to remain slightly overweight.
As in January, equity markets continued to perform remarkably well almost worldwide. One unusual exception, was the US, which is beginning to show some signs of running out of steam, with the Nasdaq in negative territory on the year to date. Despite the Trump effect, which triggered a rally on Wall Street, it would appear that the slight downward revision in the US growth outlook is beginning to have an impact on US consumers. Note the steep drop in mega-cap tech stocks such as Nvidia* and, even more so, Tesla*. Quite unexpectedly, Berlin struck big on Tuesday, 4 March, announcing a massive investment plan of several hundred billion euros, thus marking un unprecedented break with its traditional fiscal conservatism. This could cause investors to take a more positive look at the euro zone, and we are therefore raising our euro zone weighting by one notch.
The euro posted strong gains vs. the dollar, driven by the sudden shift in Germany’s fiscal paradigm. From this new starting point, we believe that pressures remain in favour of the dollar. Actual tariffs and other tariffs that may be in the pipeline by early April give the dollar a risk-aversion premium. The dollar would also get support from a cautious approach by the US Federal Reserve to its rate cut and the weakening of partner economies.
MACROECONOMIC VIEW
DEFENCE IS A KEY TALKING POINT
Head of Macroeconomic Research
and Strategy
OFI INVEST ASSET MANAGEMENT
UNCERTAINTY IS HANGING OVER US CONSUMERS AND COMPANIES
The US economy ended 2024 on a very high note, and fundamentals remain solid, but current uncertainty is beginning to show up in the confidence of economic actors and in US business and household surveys. After a strong shopping season in late 2024, US households consumed less and saved more in January. This was also due to an especially cold winter. Consumption is a key factor to keep an eye on. In addition to the job market situation – which is no longer in excess demand and which should cause US households to slow their pace of consumption slightly – other concerns have emerged, reflecting a combination of factors such as stubborn inflation and the impact expected from the customs tariffs. Inflation expectations as measured by the University of Michigan have taken off, but remain volatile, due to political polarisation and its recent change in methodology.
STUBBORN INFLATION COULD DELAY THE NEXT KEY RATE CUTS
In January, US inflation came to 3.0% year-on-year, up from 2.9% in December, and to 3.3% in its core figure, up from 3.2% in December.
Residual inflation in services, which was surprisingly high in January, especially in leisure sectors, is worth keeping an eye on, as it is the factor most closely correlated to the strength of demand. That being said, January is traditionally a very volatile month for data, due to the recalculation of seasonal factors and changes in the prices of many products. This trend is likely to be either confirmed or dispelled by future data, as the ongoing rebalancing between services and manufacturing and the cooling off of the labour market should help relieve demand pressures on prices. At its March meeting, the Fed was in no hurry to lower its rates and is likely to remain in neutral gear until it is able to get a better read on the current uncertainty
SHIFT IN THE FISCAL PARADIGM IN GERMANY
The outcome of German elections was as forecast by voter surveys, and Germany appears to be headed towards a grand CDU/SPD coalition headed by Friedrich Merz. However, two parties, AfD and Die Linke, could block the constitutional reform of the debt brake. To keep this from happening, Merz has sped up negotiations and announced a special 10-year (off-balance sheet) €500bn fund for infrastructure spending (transport energy, digital infrastructure, education, hospitals, etc.) and a change in the debt break so that defence spending exceeding 1% of GDP is exempt (with no expiration date). In addition, the 16 federal states will receive an exemption from the 0.35% of GDP debt brake. These changes must be approved before the new Bundestag takes office on 25 March to take advantage of the twothirds majority enjoyed in the current Parliament by the CDU, SPD, and the Greens. Such investments in defence are being made by all European countries and are closely linked to the outcome of peace talks between Russia and Ukraine, as well as the decision that could be made in spring to raise NATO’s defence spending target from 2% to 3% of GDP. At the European level, Ursula von der Leyen has announced a €800bn(3) plan that triggers the Growth and Stability Pact’s escape clause for defence spending over the next four years, and a new €150bn of new joint EU borrowing that would be lent to EU governments. The plan will be discussed at coming European summits.
ECB: ANOTHER 25 BPS CUT
PMI business surveys remained just barely above the expansion threshold of 50 in February and continue to decline in France. All in all, February figures suggest that there is no acceleration in economic activity in the first quarter. Euro zone inflation receded in January to 2.4% yearon- year (from 2.5% in December), including core inflation which fell to 2.6% (from 2.7% in December). The 25 bps cut in key rates at the March meeting had already been priced in, and we still expect the ECB to cut its rates further. However, whereas interest rates had been consensually regarded as restrictive until now, the usual divergence between doves and hawks is already reemerging. Meanwhile, a debate on the pace of normalisation of the ECB’s balance sheet could increase in extent in the coming weeks, given the recent increase in long bond yields.
INTEREST RATES
A NEW PARADIGM
Co-CIO, Mutual Funds
OFI INVEST ASSET MANAGEMENT
February was an unusual month for sovereign bonds, and early March even more so! Donald Trump’s statements to US trading partners continued to shake up the global order. In particular, negotiations on a cease-fire in Ukraine are looking like part of the trade war that Donald Trump has started. Against this backdrop, bond yields tracked policy statements, with wide spreads between the US and Europe. The 10-year German yield fell by 5 bps on the month, while the equivalent US yield dropped by more than 30 bps to end the month at 4.21%. More meaningfully, the slopes of the 2-10-year curves moved in opposite directions, with the US flattening by about 10 bps and the German slope steepening by about 5 bps. This divergence is due mainly to a more marked decline in US short-term rate expectations during the period.
The markets have indeed priced in more future rate cuts from the Federal Reserve. As of the end of February, they were expecting the Fed to lower its rates another three times in 2025, with the first one coming prior to this summer. These shifts reflect fears over US growth, which could be undermined by Trump’s policies.
“CHANGE WILL NOT COME IF WE WAIT FOR SOME OTHER PERSON OR IF WE WAIT FOR SOME OTHER TIME” Barack Obama
In accordance with the words of the former US president, the European reaction did not take long. The European Commission announced an €800 billion plan to “rearm Europe”. This plan, alongside the prospect of a massive stimulus plan in Germany, triggered a spectacular spike in bond yields in early March, with the 10-year German yield soaring by about 40 bps in just a few days! Meanwhile, the 10-year US yield was almost unchanged, thus causing a tightening of more than 60 bps within a few weeks. Interestingly, the spread vs. France was relatively unchanged. Net issuance in the euro zone is likely to pull down long bond prices, which we expect to accentuate the steepening of curves. We nonetheless believe that these bouts of volatility offer opportunities to add to duration.
The European Central Bank (ECB) just lowered its key rate to 2.5% in early March and will have to remain especially alert to any slippage.
CREDIT SPREADS REMAIN IMMUNISED
Recent months’ trends in euro corporate bonds spilled over into February. Valuations remain volatile as they track interest-rate trends, in contrast with stable and resilient risk premiums, all driven by carry that is historically favourable to both high yield and investment grade credit. Despite the tensions brought on by Trump’s announcements, technical factors (abundant investor liquidity, inflows, issuers’ solidity, and attractive yields) and strong earnings releases by companies continue to offer solid support to risk premiums, which have remained stable. Meanwhile, the primary market has remained quite busy so far this year, highlighted by a diversity of issuers in terms of rating, geography, maturity, and seniority. This shows how strong market appetite is, appetite that is also showing up in average demand (four times greater than supply) and the lack of premium compared to bonds traded on the secondary market. Accordingly, we remain constructive on corporate bond markets, although we are not as bullish as we had been since 2023.
The spike in the German 10-year yield on 5 March alone after the stimulus plan announced in Germany. This spike was unprecedented since 1990.
| BOND INDICES WITH COUPONS REINVESTED | FEBRUARY 2025 | YTD |
|---|---|---|
| JPM Emu | 0.69% | 0.57% |
| Bloomberg Barclays Euro Aggregate Corp | 0.60% | 1.04% |
| Bloomberg Barclays Pan European High Yield in euro | 1.23% | 1.70% |
EQUITIES
A SPIKE IN INCERTITUDES AND VOLATILITY
Co-CIO, Mutual Funds
OFI INVEST ASSET MANAGEMENT
Two months into the year, agitation is still just as strong. The Trump administration continues to shake up the markets with sensational announcements, from the pharaonic “Stargate” project to dominate the artificial intelligence (AI) sector to heavy-handed diplomacy with Asia and Latin America. Announcements of customs tariffs are batted about as negotiating tools.
This offensive strategy, which aims to consolidate US supremacy, is reviving uncertainty and volatility, to the regret of investors still trying to find their bearings. The phase of euphoria appears to be over, while companies continue to sound a cautious tone in reaction to geopolitical situation in constant flux.
AI CATCHES ITS BREATH
With January’s DeepSeek(4) meltdown now in the past, the AI sector has recovered some peace-of-mind. Fears of low-cost disruption from China are fading, now that Western leaders have reiterated their plans for massive investments. While valuations are still under close watch, a new dynamic could emerge, with AI accelerating in unexpected sectors, such as manufacturing and services, driven by lower costs.
After getting the year off to a chaotic start, the markets look willing to bet on this next wave. Speed of adoption is still the big unknown, although financial research is beginning to suggest early adoption of AI solutions by companies. If so, there’s a good chance that returns on investment will be substantial for a number of actors, which would justify high valuations.
Reporting season is coming to a close in the US. Corporate results are, on the whole, in line with expectations, with almost 12% yearon- year growth. 2025 consensus forecasts have changed little and reflect companies’ ongoing rather conservative tone. Few of them have announced an acceleration in business momentum so far this year, and few have meaningfully raised their full-year guidance. Moreover, top-line surprises are at a historically low level. Household consumption still looks just as resilient, but non- AI business investment is still below expectations.
EUROPE SPEEDS UP; ASIA TAKES OFF
Quite unexpectedly, European markets remain bullish. This is probably due in part to hopes for ending the Ukrainian conflict, even though such an end is looking more and more like a capitulation. The outcome of German elections also raises hopes for a fiscal boost that could restart the German industrial engine. At the mid-point of earnings releases, we haven’t seen any bad surprises likely to derail European markets’ “catching up” phase. But it’s mainly the defence sector that has recently drawn strong interest from investors. European defence budgets will have to shift to warp speed to offset the US’s planned withdrawal from some operating theatres. And there is good reason for believing that buying European will be one of the EU member-countries main goals.
China continues to surf on the DeepSeek(4) wave, with a gain of almost 20% on the year to date, driven mostly by Chinese tech stocks. Sector representatives recently met with Xi Jinping to demonstrate its full capacities at a time when US tech seems omnipresent. The recent prominent public reemergence of Jack Ma, the flagship founder of Alibaba*, an e-commerce and cloud company, was clearly not by chance. After the German government’s surprising announcement to boost the German economy and, accordingly, the European economy, European companies could benefit from this extensive fiscal stimulus, at least in the medium term. At the very least, flows that until now had gone to the US could be redirected to Europe. In light of this, the preference we had for Wall Street no longer seems justified.
The approximate loss of market cap by Tesla* in February.
| EQUITY INDICES WITH NET DIVIDENDS REINVESTED, IN LOCAL CURRENCIES | FEBRUARY 2025 | YTD |
|---|---|---|
| CAC 40 | 2,04% | 10,00% |
| EuroStoxx | 3,44% | 10,95% |
| S&P 500 in dollars | -1,34% | 1,38% |
| MSCI AC World in dollars | -0,60% | 2,73% |
EMERGING MARKETS
CHINESE EQUITY RALLY: THE ‘TWO SESSIONS’ TEST
Chief Executive Officer
SYNCICAP ASSET MANAGEMENT
A booming Chinese tech sector is drawing capital flows into Chinese equities, and a rotation of investments in Asia. The ‘Two Sessions’ meeting on China’s economic guidelines is beginning. The conclusions of this meeting could confirm this trend.
ROTATION OF CAPITAL FLOWS IN ASIA
Chinese equities, particularly in the tech sector, are drawing heavy inflows. The Hang Seng Tech index is up by 30% since mid-January, driven by the DeepSeek* effect. This trend reflects international investors’ new interest in the Chinese market, after they had been driven off for a while by domestic political and economic concerns. Meanwhile, capital has flowed out of Japanese and Indian equities. Indian shares have been polar opposites of Chinese equities in recent years. Since the start of 2020, the MSCI India has gained almost 70% in USD, while the MSCI China has lost 15%. The trend has reversed itself since mid-September 2024, since China took measures to exit the real-estate crisis and deflation. Since then, Chinese equities have gained 35%, while Indian shares have lost 15% in USD terms.
POSITIVE LONG-TERM OUTLOK FOR INDIAN EQUITIES
Indian equities are still attractive for the long term. India is enjoying sustained growth, driven by a booming industrial development cycle and the emergence of a middle class of consumers. However, India’s valuation has become demanding, with a P/E now more than 22. The current consolidation is providing some upside potential, with a 2025 P/E that is now more reasonable, at about 20.
REBIRTH OF THE CHINESE TECH SECTOR
Chinese national pride has been buttressed in recent months by DeepSeek* and a parade of humanoid robots during the Chinese New Year, orchestrated by Unitree Robotics*. These events have boosted tech stock valuations, particularly in the humanoid robots sector, which is up by 40% to 100% since the New Year. A humanoid robot ETF(5) has even been launched, with inflows of almost RMB 1 billion within a few days.
REHABILITATION OF ENTREPRENEURS
President Xi Jinping recently met with about 30 prominent business leaders, including Jack Ma of Alibaba*, marking a shift in strategy. Xi’s speech stressed the important role of private companies and entrepreneurs in China’s prosperity, while also pointing out their societal role in harmony with the party’s priorities. The new message is this: “OK for you to prosper first, then common prosperity”, i.e., a 180-degree U-turn.
These are all positive signs for investors. China’s economic priorities are clear: technological independence, new energies, cutting-edge industry, robotics and food security. These sectors are likely to receive government support in the coming years. The Hang Seng’s 2025 P/E is currently 18, vs. 23/25 prior to the regulatory wave of 2021, with earnings expected to rise by 20% in 2025. China’s overall 2025 P/E is still rather low, at almost 12.
Bottom line: the current rally by Chinese equities looks more solid and longer-lasting than previous rallies. Momentum is slackening less and less, and the government now seems to be focusing on the economy rather than security or societal issues. Investors will keep close track of the outcome of the “Two Sessions” meeting, which is likely to announce concrete economic support measures. In the meantime, a pause or consolidation by Chinese equities could offer attractive investment opportunities, as we still see considerable potential for rerating.
The PMI composite index in China in February, up by 1 point vs. January. The main sub-components also improved, thus pointing to an overall uptick in the economy.
US AND CHINESE TECH SECTORS AND EARNINGS GROWTH TRENDS
Document completed on 10/03/2025
Carry: a strategy that consists in holding bonds in a portfolio, possibly even till maturity, in order to tap into their yields.
Credit risk: in bond management, this is the risk that a bond’s issuer will be unable to repay the principal or interest owed to investors.
Duration: weighted average life of a bond or bond portfolio expressed in years.
Inflation: loss of purchasing power of money which results in a general and lasting increase in prices.
Inflation breakeven rate: the difference between the yield on a traditional bond (nominal yield) and the yield on its inflation-indexed equivalent (real yield).
Investment Grade/ High Yield credit: Investment Grade bonds refer to bonds issued by borrowers that have been rated highest by the rating agencies. Their ratings vary from AAA to BBB- under the rating systems applied by Standard & Poor’s and Fitch. Speculative High Yield bonds have lower credit ratings (from BB+ to D, according to Standard & Poor’s and Fitch) than Investment Grade bonds as their issuers are in poorer financial health based on research from the rating agencies. They are therefore regarded as riskier by the rating agencies and, accordingly, offer higher yields.
PER: Price to Earnings Ratio. A stock market analysis indicator: market capitalisation divided by net income.
PMI: the Purchasing Managers Index (PMI) from Standard & Poor’s assesses the relative level of business conditions. The data is compiled from a survey of purchasing managers in the manufacturing industry. A reading above 50 indicates expansion, and below that indicates contraction. The composite PMI is a PMI index representing both the manufacturing and services sectors.
Sovereign bond: a debt security issued by a national government. The sovereign yield is the yield on a sovereign bond.
Spread: difference between rates.
Volatility: corresponds to the calculation of the amplitudes of variations in the price of a financial asset. The higher the volatility, the riskier the investment will be considered.
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