PERSPECTIVES
MARKET AND ALLOCATION
Our experts monthly overview
OUR CENTRAL SCENARIO
Deputy Chief Executive Officer,
Chief Investment Officer
OFI INVEST ASSET MANAGEMENT
“Tariffs or not tariffs?”
In the aftermath of Donald Trump’s 2 April tariff announcements, deescalation appears to be the order of the day, with a 90-day suspension of customs tariffs and the start of negotiations with the US’s trade partners. The UK has just signed an agreement. Negotiations with China are looking more challenging. The failure, for the moment, of the strategy to isolate China while moving closer to Russia - as seen in the 9 May commemorations in Moscow - is unlikely to soften the US stance.
The tariff suspension should also be seen against the backdrop of rising US debt yields. After tracking the equity markets sharply downward, the US 10-year yield was driven up sharply by concerns over US debt, dollar weakness, and, most of all, budget talks (an especially close eye will have to be kept on this issue in the coming months). Interest rates are thus looking like a counterweight to Trumpian disruption.
As for the US Federal Reserve, with it having been confirmed that Jerome Powell will remain in office until May 2026, he is seeing risks on both the inflation and employment fronts.
The US economy is likely to slow in the second half of the year, and the Fed will probably wait until the third quarter and greater clarity, before resuming its easing cycle. We believe that the three or four rate cuts currently priced into the curve are overdone. We are therefore taking some profits on US debt and taking on exposure to a steepening in yield curve.
The European Central Bank (ECB), meanwhile, is likely to continue lowering its rates. Its target rate will depend on the outcome of trade talks but will probably be lower than initially expected.
Corporate bond yields rose, due to the equity market correction but not to fundamentals. We are taking this opportunity to raise our high yield exposure, thereby exploiting the carry that has been partly restored.
While first quarter corporate earnings were solid on the whole, full-year forecasts are uncertain. Equity markets regained the ground they had lost in early April, and we are therefore moving to a neutral stance on US equities. Indeed, coming tax cuts will provide some support but this will be offset by the first impacts on growth and employment. Moreover, the market looks expensive. In contrast, we are sticking to our slightly overweight stance of the European equity markets, where valuations look less demanding, given that stimulus plans announced in Europe, Germany in particular, are likely to begin producing their effects late in the year against a backdrop of rate cuts.
OUR VIEWS AS OF 09/05/2025
Amidst rising tariffs and considerable market uncertainties, the European Central Bank lowered its key rate by 25 basis points to 2.25%. This was widely expected, but the ECB was also signalling that euro zone inflation was headed in the right direction. This was backed by falling oil prices and a rising euro. Inflation indeed appears to be under control, but growth seems to be a concern of ECB members – who flagged more rate cuts to come. With interest-rate and inflation expectations having drastically adjusted in April, we are moving to a neutral stance on bonds. In corporate bonds, we are also moving to neutral in Investment Grade, due to its interest-rate component. In contrast, we are now overweighting High Yield, as it seems to offer a good risk-reward pairing at current levels.
April was rocked by extreme volatility but, ultimately, no big change on the month. Of course, the equity markets were buffeted daily by Donald Trump’s hot and cold pronouncements. Sadly, this overshadowed quarterly earnings releases on both sides of the Atlantic, which were ultimately quite good. The only adjustment to make is in European companies’ earnings per share (EPS), due to exchange rate losses caused by the dollar’s weakness (at least for exporting companies). As things now stand, financial analysts are still expecting earnings growth (rather significant in the tech-driven US, but a little less so elsewhere). Last November, we had flagged our preference for the US market, counting on the deregulation that would flow from the victory of candidate Trump. President Trump, however, has not turned out to be the locomotive that US companies had hoped for, and they will be among the victims of this mad trade war if it continues. For this reason, we are readjusting our cursor, downgrading US companies vs. their European peers, which, moreover, are lower-priced. The valuation gap is, in fact, about 50%, although part of this is due to lower earnings growth expectations.
In Asia, China still looks attractive under either scenario - either tension recede with the US, which will boost Chinese companies, or tensions will worsen, in which case the government will step in with an even more aggressive stimulus plan.
The euro-dollar got a big boost from the shift in the German fiscal paradigm, followed by the shift in the US trade paradigm. We are sticking to our neutral stance on the exchange rate for three reasons: monetary policy anticipations look overly optimistic on both sides of the Atlantic; the good euro zone macroeconomic news has now been priced in; and Trump’s policies have created a risk premium on dollar assets, which limits the benefits to the dollar, despite the high level of uncertainty.
MACROECONOMIC VIEW
TARIFFS ARE UNDERMINING US GROWTH
Head of Macroeconomic Research
and Strategy
OFI INVEST ASSET MANAGEMENT
US GDP shrank by 0.3% (annualised) in the first quarter. Companies got a jump on tariffs by boosting their imports, thereby triggering a collapse in the trade balance. These imported goods have already led to expanded inventories, but are also expected to make a considerable positive contribution to GDP in the second quarter. Anticipation of tariffs in economic agents’ decisionmaking mainly affected the most volatile growth components, i.e., foreign trade and inventories, but not just them. Households and companies also moved forward their purchases of certain consumer and capital goods in the first quarter, which boosted domestic demand more than expected.
THE CURRENT INCERTAINTY’S IMPACT ON THE REAL ECONOMY WILL BECOME CLEARER IN THE COMING QUARTERS
The current uncertainty is likely to weigh on future consumption and investment. However, we expect a mere slowdown, not an actual recession. Meanwhile, Congress is expected this summer to pass the reconciliation law that will clear the way to implementing Trump’s tax cuts.
Major companies’ comments in April surveys suggest that, to control costs, they are turning towards layoffs (after having frozen hiring) against a backdrop of slackening demand and an uncertain economic environment. The unemployment rate is holding steady, and the impact of the current uncertainty or stricter immigration policy has not yet shown up in hard data.
WILL PROTECTIONNISM BOOST INFLATION? THE FED IS STANDING BY
High-frequence data show that prices of products subject to tariffs have already begun to rise(1). If costs incurred from higher tariffs are passed on into final prices, inflation as measured in official statistics should begin to tick up temporarily in the coming months. So, the Fed is in no rush to lower its rates, unless the job market were to suddenly weaken more than expected.
EVEN IN THE EURO ZONE, THE WORSENING IN CONFIDENCE HAS NOT SHOWN UP IN HARD DATA
Euro zone GDP (non-annualised) rose more than expected in the first quarter, by +0.4% after + 0.2% in the fourth quarter 2024. Part of this growth is due to Ireland, but this was still a satisfactory number. Spain continued to benefit from robust domestic demand, while Italy, Germany and France turned up modestly compared to yearend 2024. However, consumption was rather tentative, and the European Commission’s latest economic surveys show both a clear drop in household confidence on the year to date and a wait-and-see attitude in companies’ investment plans.
For the rest of the year, economic growth will therefore depend mostly on the outcome of trade talks between the US and the euro zone, and although risk is on the downside, our forecasts assume a moderate expansion in economic activity.
BAD SURPRISE ON INFLATION
In April, euro zone total inflation was stable at 2.2% but was surprisingly high in its core component, at 2.7%, vs. 2.4% in March. The services sector was the main cause for this increase, up by 1.3% on the month to 3.9% year-on-year. This could be due to higher prices of certain services during the Easter season (as the country-by-country breakdown shows that transport, housing and holiday travel prices were all high).
THE ECB IS UNLIKELY TO ACCELERATE ITS KEY RATE CUTS
The ECB’s 25 basis point cut in April, to 2.25%, had been fully priced in, and we still expect it to lower its rate further. By how much will depend mainly on the outcome of current trade negotiations with the US, on a possible European response, and on how fast the new German government implements its stimulus plan in real-world terms.
(qoq annualized in %)
INTEREST RATES
IN THE EYE OF THE STORM
Co-CIO, Mutual Funds
OFI INVEST ASSET MANAGEMENT
Market conditions got much worse in early April with Trump’s tariff announcement. This was followed by steep volatility in financial assets over several trading sessions, raising fears of the worst for the global economy. Relief came in the form of a 90-day suspension of “reciprocal” tariffs. This radical shift by the Trump administration helped ease tensions. While this ongoing storm will leave a trail of destruction, it ultimately allowed bond assets to achieve a strong month in April. European sovereign, investment grade and high yield indices all returned to positive territory on the year to date. This was also the case for US and UK bond indices. So, bond yields on the whole fell, but we would point out in this context that sovereign yield curves steepened considerably in all three geographical areas.
WHY ARE THE CURVES STEEPENING?
Investors quite expected that central banks would have to ease their monetary policies in response to downward risks to growth. And, indeed, 2-year rates fell by 30-40 basis points in all three geographical areas in April.
True, the ECB, which lowered its rates by another 25 basis points, delivered an asymmetric message on risks, stating that the concept of neutral rates is suited only to a “shock-free” world, which is far from being the case currently. The markets are currently pricing in a key rate that could fall to 1.50% this year. This scenario is possible, but we believe it is overdone at this point. Accordingly, we are rather cautious on duration in Europe, positioning ourselves close to neutral.
On the other side of the Atlantic, Jerome Powell continues to insist on not rushing things, as tariffs are casting doubts on inflation expectations and not just in the short term. And yet, the markets are pricing in three to four rate cuts this year. Here again, our scenario is more moderate, and we prefer reducing our duration exposure at levels close to 4.20% on the 10-year US yield. Meanwhile, we find the short section of the curve a little expensive under 3.80% as long as US hard data show no tangible signs of worsening markedly.
CORPORATE BONDS, COME WHAT MAY
Like other markets, euro Investment Grade and High Yield credit were highly volatile, as seen in the stark widening in spreads (particularly in High Yield and subordinated bonds), in the days following the tariff announcements. Thereafter, spreads returned almost to their end-March levels. Better yet, both these markets were in positive territory on the month (+0.99% in euro Investment Grade and +0.09% in euro High Yield). They benefited from both their attractive carry and falling interest rates. Keep in mind that investors kept their cool during the period, despite outflows from these assets. Indeed, it was mainly inflows into ETFs and market repricing that exacerbated volatility. Meanwhile, after a two-week break due to market volatility, the primary market started back up very strong in the last week of April, showing that investor appetite had returned. Against this backdrop, we believe that High Yield corporate bonds stand out and have been made once again attractive by higher carry than at the start of the year and lower sensibility to interest rates.
The level hit by the Markit iTraxx Europe Crossover year on 9 April.
By way of comparison, its 1-year average is 306 basis points.
| BOND INDICES WITH COUPONS REINVESTED | APRIL 2025 | YTD |
|---|---|---|
| JPM Emu | 1.93% | 0.73% |
| Bloomberg Barclays Euro Aggregate Corp | 0.99% | 0.98% |
| Bloomberg Barclays Pan European High Yield in euro | 0.09% | 0.63% |
EQUITIES
SWITCH OFF THE SOUND… SWITCH IT BACK ON
Co-CIO, Mutual Funds
OFI INVEST ASSET MANAGEMENT
Who could have predicted when US tariffs were announced on 2 April that the month would end up more or less level? The late-April rally is, in fact, one for the record books, as the S&P has only very seldom risen on nine straight days. Ultimately, the post-4 April rally was almost 12%. However, the sudden swing caught many investors wrong-footed, having shifted their portfolios to high-visibility stocks as the risk of recession increased.
A TRUMPESQUE MONTH
April was marked by announcements, reversals, threatened reprisals, about-faces and hot-and-cold talk. In short, you might say it was a “Trumpesque” month. By the end of it we were left dazed, both by US political gesticulations and by the sudden market shifts. Seven days after imposing his tariffs on the entire world, Donald Trump reversed course and decreed a 90-day moratorium to provide time to negotiate with trading partners.
The moratorium also gave the bond market time to regain its composure, after the 10-year yield peaked at 4.45% a few hours after the 2 April announcements. The moratorium also pushes the next deadline to 9 July. Let’s hope that, by then, most US trade partners will have finalised an agreement with the US administration.
US companies were also left dazed by this episode. Many of them have even given up trying to provide fullyear guidance amidst uncertainty of historic proportions. Profit warnings are accelerating and affecting more and more household consumption companies, probably pointing to the beginning of a wait-and-see attitude by US consumers. Procter & Gamble*, Colgate*, Pepsi* and Kraft- Heinz*, just to mention a few, have blamed a more challenging environment, marked not only by new tariffs, but also by an inflationary context that has been very much with us since the end of the Covid lockdowns, sudden market drops, and a highly uncertain economic context. Other companies reported that they had planned ahead, just in case, by importing massive amounts of intermediate or finished goods before the new customs barriers were erected. The inventories they have built up should allow some of them to maintain the same price environment until trade agreements have been reached. Even so, consensus forecasts are being adjusted and are now assuming just 7% earnings growth for 2025.
At a P/E of almost 22 times 2025 earnings, the US market is clearly not cheap, given the challenges that it is facing.
EUROPE DIDN’T DO TO BADLY
In comparison with the US, Europe is regaining some investor favour. The business environment there looks stable; European stimulus plans – the German one in particular – are expected to sustain growth; and performance gaps are becoming significant, especially in the euro, which has gained almost 10% from its recent lows. Incidentally, the exchange rate is likely to impact earnings growth forecasts for European companies as such a swing had not been expected by the consensus of analysts. At a 2025 P/E of 14, the historic European discount has vanished, but we are still far from US market valuations.
BEST TO STAY CAUTIOUS
After such a rally by US markets, we feel this is a good time to neutralise this bet, given how uncertain the future is. US companies themselves are saying how hard the environment is to forecast. It is hard to imagine at this point what could propel the markets a little higher, especially as massive Fed rate cuts do not now look realistic. We are therefore moving to a neutral stance on US equities.
This is the amount of share buybacks announced in April by Japanese companies, three times higher than in 2024.
| EQUITY INDICES WITH NET DIVIDENDS REINVESTED, IN LOCAL CURRENCIES | APRIL 2025 | YTD |
|---|---|---|
| CAC 40 | -2.11% | 3.50% |
| EuroStoxx | 0.31% | 8.01% |
| S&P 500 in dollars | -0.70% | -5.04;% |
| MSCI AC World in dollars | 0.93% | -0.40% |
EMERGING MARKETS
THE CHINESE MODEL PUT TO THE TEST BY THE TRADE WAR
Chief Executive Officer
SYNCICAP ASSET MANAGEMENT
“Liberation Day”(2) triggered a shockwave that at first hit US assets hard. In reaction to this tough state of affairs, Donald Trump decided to ease his strategy. Paradoxically, China seems quite self-assured, even though it is clearly in the crosshairs of the United States.
The US tariff policy is a long-term, yet risky strategy, as it turns its back on several decades of globalised trade. For Trump, the strategy is clear: the policy aims to generate income for the US (which will allow to lower taxes), reduce trade and fiscal deficits, weaken China, and reindustrialise the US. It is still too early to say how much sense this strategy makes in the long term, but in the short term its implementation has been confusing to say the least and is clouding visibility across the board. That being said, after the shock of “Liberation Day”, calmer heads appear to have prevailed and we seem to be entering a phase of bilateral negotiations.
HEAVY MARKET VOLATILITY
“Liberation Day” triggered heavy volatility on the markets, especially in Asia, which is at the heart of the global trade.
Exports to the US account for a considerable portion of GDP of many Asian countries, such as Vietnam and Thailand. China less so, as its dependence on exports to the US has been declining since 2018, but exports to the US still account for almost 3% of China’s GDP and a trade surplus of more than 350 billion dollars.
With tariffs of 137% or 147% between China and the US, trade will collapse between the two countries if no agreement is reached. The impacts of these taxes, moreover, will be very negative for US consumers. This may be why China reacted with immediate reprisals, including high taxes on US goods and restrictions on exports of rare earths. Through its resolutely firm attitude, China wants to display an image of stability and respect for international trade law and paint itself as a reliable partner at a time when it is seeking to bring back foreign direct investments. It is also well aware of its current manufacturing strength. The lead it has taken in recent years in this field makes its value chain a must-have in the short term.
TWO SCENARIOS ARE POSSIBLE
We see two possible scenarios, or perhaps a combination of the two, for the coming months:
1 - Dialogue resumes. This is the path of reason, which is in both countries’ interests and should result in a substantial decline in tariffs.
2 - A Chinese stimulus plan, the extent of which will, of course, depend on the state of dialogue with the US. Chinese Prime Minister Li Qiang has stated that China can offset this external shock by lowering interest rates and banks’ mandatory reserve requirement. This is above all, an opportunity to accelerate the change in the Chinese growth model in order to restart domestic consumption and to lessen its exposure to exports. A stimulus plan of at least 2,000 billion renminbi (about 1.5% of GDP) would be necessary, according to the consensus. In both cases, Chinese equities would probably react positively.
WHAT ABOUT THE EQUITY MARKETS?
China and India seem to be the markets that are most immunised in the medium term. Chinese companies have few international shareholders and are reasonably priced. The P/E of the MSCI China is about 11.5, with earnings forecast to rise by 7% to 8% in 2025, and earning revision momentum that stimulus measures could help stabilise.
As an exporter of services more than manufactured and agricultural goods, India is less exposed to tariffs. In the medium term, it could also benefit from China-workaround manufacturing investments. And, lastly, after an almost six-month consolidation between September 2024 and March 2025, its market valuation has returned to its historic standards (i.e., P/E of about 20), with decent projected earnings growth of almost 12% this year.
The decrease in container departures from China to the US since their mid-April peak, following the sudden halt of Sino-US trade. The effects of this trade war are immediate, and negotiations are urgent.
Container departures from China to the US
Document completed on 09/05/2025
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.
Sensitivity: Bond sensitivity is a measure that indicates how a bond’s price reacts to changes in interest rates.
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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