PERSPECTIVES

OUR CENTRAL SCENARIO

ÉRIC BERTRAND
Deputy Chief Executive Officer,
Chief Investment Officer
OFI INVEST ASSET MANAGEMENT

The markets’ gravity-defying resilience.

Faced with the impacts of the Sino-US trade war, the shutdown⁽¹⁾, renewed questioning of artificial intelligence investments, and the fiscal mess in France, the markets have kept their Zen-like calm. Equity indices are still near their highs, while bond yields have stabilised at a low level and have even seen a decline in volatility.

Beyond sensational announcements, the markets are focusing on fundamentals, i.e., economic figures and corporate earnings. Here is some insight into their current performances. US growth has indeed slowed but remains resilient (based on the latest figures that are available, due to the shutdown) and although inflation is still a little high, the US Federal Reserve is likely to stick to its easing cycle in December. Rate-cut forecasts for 2026 are less and less optimistic, in line with our scenario, which is why we continue to overweight US debt and will do even more if long bond yields move back up. This opinion is subject to change in the event that the Supreme Court suspends the Trump administration’s tariffs.

In Europe, growth has held up despite the trade war, and the ambitious roll-out of German stimulus plans in 2026 is likely to provide an additional boost. With this in mind, the ECB has, on the whole, probably completed its easing cycle, and we reiterate our neutral stance on bonds pending higher yields (due in particular to the increase in the German fiscal deficit) to add to duration.

The credit market is stable on the whole but looks rather expensive and is starting to show some weakness in the high yield space, as seen in the performance of CCC-rated paper. We therefore remain defensive, pending a widening in spreads to add to exposure.

Earnings reporting season was strong once again, in particular by US tech companies. Numbers were outstanding from AI hyperscalers⁽²⁾ but more and more questions are being raised about how profitable their investments will ultimately turn out to be. It makes sense to pay a lot for pick and shovel makers, but gold still has to end up being discovered. Answers probably won’t be forthcoming by yearend, and investors will probably shift their gaze towards 2026 earnings forecasts, which are rather bullish on both sides of the Atlantic. This is why we are sticking to our neutral stance on Europe and the US, despite gains already achieved in 2025. Meanwhile, we reiterate our positive view on Japan, which has a new pro-growth prime minister, and on China, which is likely to see some benefits from trade war with the US, such as in the latest faceoff, which was resolved in China’s favour.

OUR VIEWS AS OF 12/11/2025

In October, the US Federal Reserve lowered its key rate by 25 basis points, while the European Central Bank confirmed that its key rates were still appropriate. Long bond yields fell slightly on US shutdown⁽¹⁾ concerns, renewed tariff tensions between the US and China, and risks of political instability in France. Against this backdrop, we are keeping our cursors unchanged on bonds, except for inflation breakevens, which we upgraded by one notch on their mid-month dip. Tactically, we are tending towards gradually lengthening our duration in the main regions, with our next target on the 10-year US yield being around 4.20%/4.25%. We are leaving our stance unchanged on investment grade and high yield corporate bonds, as risks continue to exist on the lowest-rated issuers.

Despite concerns that emerged late in the month, equity markets are still near their summits almost worldwide. Burnt by their excessive caution, investors have decided to stop pricing in a risk premium. And yet, it would be illusory to believe that risks have vanished, even though the environment may seem less stressful than a few months ago. At 25 times future earnings in the US and 17 times in Europe, we would have serious reasons to be worried if forecasts for 2026 did not point to valuations more in line with historical performances. For, next year’s earnings are expected to be up sharply next year on both sides of the Atlantic. Time will tell if this optimism is justified. Once again, artificial intelligence is the buzzword, but best to be on the lookout for disappointments. We have decided to stick with our neutral stance on the equity markets, while overweighting Asia and emerging markets in general, due to their less demanding valuations.

In October and early November, the dollar rose slightly against the euro, due in part to repositioning by investors who had already been heavily short the dollar, and in part to the positive outcome of the summit meeting between Donald Trump and Xi Jinping in Korea. We remain neutral on the euro-dollar exchange rate, which our models suggest is currently fairly priced.

MACROECONOMIC VIEW

The longest shutdown⁽³⁾ in history

OMBRETTA SIGNORI
Head of Macroeconomic Research
and Strategy
OFI INVEST ASSET MANAGEMENT

Since the 1970s, there have been about 20 shutdowns in the US. This time, the key issue between Republicans and Democrats is extending an Obamacare mechanism that helps low-and medium-income households pay their health insurance premiums. The Republicans hold a majority in the Senate, but the filibuster rule makes it possible to prolong debate indefinitely. A majority of 60 votes (out of 100) is needed to cut off debate and approve the law, but the Republicans have just 53 seats. This mechanism aims to protect minority rights by forcing the majority to seek out a compromise.
Polls suggest that the Republicans are being blamed for the shutdown and that there is growing concern over the economy, even though previous shutdowns had only a temporary impact on activity. Pressure also appears to be mounting among the Democrats, given that some of the shutdown’s collateral impacts, such as reduced financing of food aid, are hitting the poorest of their voters. Such pressures have sped up talks, and eight Democrats have joined the Republicans to approve a budget providing stop-gap funding. The longest shut down in contemporary US history is expected to come to a close soon, but with risk pushed back to late January 2026.

WHAT DO ALTERNATIVE DATA TELL US?

As long as official public data have not been released, alternative private figures, while less exhaustive, constitute the only source of information on economic trends. Available data suggest that the job market stabilised between early September and early October, as seen in private-sector job creations reported by ADP. Other indicators, however, show a risk of a new softening, with an increase in layoffs and a reduction in job vacancies. Regarding consumption, the retail sales leading indicator (ex food and autos) for October, published by the Chicago Fed, points to a slowdown compared to the third quarter, but without any steep drop.

THE FED STILL FACES A CHALLENGING SITUATION

With total inflation at 3% in September and services inflation seeming to moderate, the US Federal Reserve lowered its key rates by 25 basis points (from 4.25% to 4.00%) and announced a halt to the normalisation of its balance sheet beginning in December. However, the situation remains challenging for the Fed, which is facing downside risks on employment and upside ones on inflation. This is causing a wide dispersion of opinions on the monetary policy committee, and the Fed’s December decision is likely to be subject to intense debate. In its projections, the Fed expects another slight uptick in unemployment (excluding the “shutdown” effect), to 4.5% by yearend, which would entail a moderate slowdown in growth, in accordance with our scenario. Against such a backdrop, a new rate cut in December, in our view, is still on the cards if the tariff impact remains moderate, as it is now.

THE ECB IS IN AN EASIER PLACE

In 2025, growth was resilient despite trade uncertainties, including in France, and in spite of glum business survey numbers connected to domestic political instability. French economic activity was surprisingly strong in the third quarter (+0.5% after +0.3% in the second quarter), thanks to positive domestic demand, driven by business investment and unusually high exports. We will nonetheless have to keep an eye on whether the political uncertainty that emerged after summer will constitute an obstacle to future growth.
As for the euro zone in general, growth (+0.2% in the third quarter) remains very uneven: Germany and Italy were flat, penalised in part by tariffs on their exports, while Spain remained strong (+0.6%), as did smaller economies, such as Portugal. And, lastly, total inflation pulled back to 2.1% in October, while core inflation remained stable at 2.4%, due to stubborn rises in service prices.
Monetary policy will continue to be data-driven, and the new economic forecasts that the ECB will release in December will be the key to better medium-term visibility (out to 2028) on in¬flation expectations compared to the 2% target. At this point, we continue to forecast a terminal rate of about 2%. For the moment, inflation and growth risks seem to be well balanced for the coming months.

Sources: Macrobond, Ofi Invest Asset Management as of 04/11/2025.

INTEREST RATES

Ordinary paradoxes?

GEOFFROY LENOIR
Co-CIO, Mutual Funds
OFI INVEST ASSET MANAGEMENT

Interest rates on the whole shifted downward in October. This may be due to renewed risk aversion, driven by three main factors: the shutdown⁽⁴⁾ of US government services, trade tensions between China and the US, and political instability in France.
Despite these risks, interest-rate volatility receded further on the month. The MOVE index, which measures volatility of US bonds, hit a four-year low at 65.75. This is a first paradox, but one that is understandable based on a closer look at US rates. The 10-year yield fell only slightly, by 5 basis points to 4.10%, after a post-FOMC rebound when the US Federal Reserve lowered its rates by 25 basis points. This decision had already been priced in, even though it was not unanimous. The Fed chairman, Jerome Powell, acknowledged that the committee was divided and that the decision for the December meeting remained opened.
On the geopolitical front, tensions between China and the US ticked up, particularly regarding rare earths. Beijing put in export restrictions, and Washington threatened to raise tariffs. Tensions ultimately eased late in the month in the run-up to the meeting between Xi Jinping and Donald Trump.

THE FRENCH PARADOX

In the euro zone, the ECB confirmed that its key rates were at suitable levels. The Bund ended the month at 2.64%, down by 7 basis points, while the French OAT⁽⁵⁾ fell by 12 basis points to 3.42%, despite Standard & Poor’s’ surprising downgrade of France to A+ (with a stable outlook). The OAT/Bund spread thus narrowed slightly, as the markets cheered the reopening of Parliamentary debate on the bud¬get. French growth figures at month-end were also surprisingly strong, with a 0.5% expansion for the third quarter. Thus is the French para¬dox: rates and growth are holding up, whereas France’s economic situation is worsening and uncertainties surrounding public finances remain especially high. Whereas the ratings agencies’ judgement is unambiguous, France is benefiting from the more virtuous behaviour of its European neighbours. Italy’s bond rally continues, with the BTP yielding 3.40%, down by 14 basis points, driven by more stable political dynamics and sustained inflows. Italy, in fact, is the champion of Europe this year, with its bonds gaining 3.56% on the year to date (based on the ICE BofA Italy Govt Index), vs. 0.87% for France.
In Germany, the situation is also different. While questions remain on its true capacity to implement the announced stimulus plans, the government has submitted an ambitious budget with a deficit forecast at 3.25% in 2025 and 4.75% in 2026.

A TWO-TRACK HIGH-YIELD MARKET

The credit market is also maintaining its paradox between attractive yields on offer and expensive spreads. The vision may vary greatly depending on where the cursor is placed. Nevertheless, we can see that the market would rather see the glass half-full than half-empty, no doubt influenced by the fact that subscriptions have been stronger on the year to date and by solid third quarter results.
Keep in mind, however, the special nature of the high-yield market, where, like cholesterol, an increasingly wide distinction is made between good and bad cholesterol. “Good” high yield consists of issuers rated BB/ B+, whose YTD performances range between 4.90% on BB and 5.50% on B2. Refinancing risk on these issuers has been pushed back by a few years, and their financial standings are rather healthy. “Bad” high yield, however, consisting of issuers rated CCC, is down by more than 3% on the YTD, after a very poor showing in October. These issuers are regarded as too shaky for any refinancing, and debt restructuring risk has already been priced in.

EQUITIES

And, Nasdaq is once again the winner!

ÉRIC TURJEMAN
Co-CIO, Mutual Funds
OFI INVEST ASSET MANAGEMENT

What a reporting season! As of this writing, 75% of S&P 500 companies have released their numbers, and this is one of the best reporting seasons in the past four years. The first “true” quarter after the introduction of Donald Trump’s tariffs had placed analysts on high-alert. Companies’ ability to maintain their margins was going to be put to the test, along with consumers’ appetite for keeping up a strong propensity to consume in a more uncertain environment.
Once again, the analyst consensus was overly conservative, as 63% of companies beat forecasts on both top and bottom lines. 2025 full-year forecasts have accordingly been pushed upward, once again. We now forecast almost 12% earnings growth for this year and almost 14% next year. Given that interest rates should continue falling in the coming months and that a portion of the “One Big Beautiful Bill”⁽⁶⁾ must still be rolled out (accelerated depreciation on investments in the US and tax breaks for households), the US economy is likely to hold up very well for some time more to come.

AI IN OVERDRIVE

Once again, it would be hard to overlook statements from the tech sector. The figures are so head-spinning that they raise fears of an investment bubble. We now forecast almost $500 billion in AI investments over the next 12 months in the US, or more than $60 billion more than at the start of the quarter. Some hyperscalers⁽⁷⁾ such as Microsoft* are even saying that capacity is having a hard time keeping up with demand, thus justifying new expenditure. The markets are more sceptical, as seen in the steep drop by Meta* when it also announced a big increase in its spending. Even so, since the start of September, AI stocks are up by almost another 25%, whereas the equally weighted S&P 500 has been flat.

US CONSUMERS UNDER DURESS

In contrast, there was little good news from companies exposed to US consumer spending. Profit-warnings are legion and are now coming from companies traditionally exposed to medium-income households. The propensity of the richest households to spend more is still closely linked to financial asset valuations, which are at their highs. However, tariff inflation is making life harder for everyone else. And woe be to companies that lower their earnings guidance, judging by the near-historic corrections served up to companies that do so.
In Europe, estimated earnings growth of about 2% may look anaemic in comparison with US companies, but that would be to overlook the fact that the exchange-rate impact has hit European companies headon this year. When restated for the euro/dollar exchange rate, European earnings would be up by almost 7%, not bad at all in the current context. And the outlook for the coming quarters is still encouraging, particularly when looking at the future stimulus plans that should boost the euro zone.
We reiterate our neutral stance on US and European equities, believing that equity performances are now in the shed for the year. Performances to date have outstripped estimated earnings growth for the year, which, once again, points to inflation in multiples. So, the markets are not cheap, although we do recognise that they have changed in nature, given the weightings of tech stocks in the US.
We remain constructive on Japan, where the election of Sanae Takaichi is pointing clearly to a pro-growth agenda, the main beneficiaries of which are likely to be Japanese companies. Lastly, we have made no change to our positive view of emerging market countries, led by China. The all-out competition that China is engaged in with the US will bring out some sector champions, which is an essential condition to a further repricing of the Chinese equity market.

EMERGING MARKETS

4^th Chinese plenum: boosting demand... through a supply-side policy!

JEAN-MARIE MERCADAL
Chief Executive Officer
SYNCICAP ASSET MANAGEMENT

China wants to develop its domestic market. That is one of the major goals set forth at the 4^th Plenum for the 15^th Chinese five-year plan. But the underlying spirit of this Plenum is a supply-side policy. What’s behind this goal and what is the outlook for Chinese equities?

China has set some major goals for the next five years, including technological enhancement, selfreliance in security matters, and development of its domestic market. The word “fight” was used on several occasions, far more than five years ago, e.g., China “must dare to fight and be good at fighting”. The Plenum expressed confidence in China’s ability to maintain long-lasting and steady growth in a very challenging and even hostile inter¬national environment. The Chinese Communist Party (CCP) wants to pursue fundamental reforms to enhance living conditions for its people and build a “beautiful China”!

One of the more specific goals announced was to achieve per capital GDP comparable to that of a moderately developed country by 2035. That would require almost doubling GDP, hence implied annual growth of at least 4.5%.

This is a rather ambitious target the midst of a trade war and of lacklustre domestic demand due to the realestate crisis and the collapse of its birthrate.

INTEGRATING THE ENTIRE VALUE CHAIN

To meet these goals, the government plans to promote technological and industrial innovation to be selfreliant and create a robust domestic consumer market. The CCP is counting on supply-side innovation to boost domestic demand and not on concrete measures to boost consumption, at least for the moment. For this latter goal, the only measure planned is to eliminate existing administrative obstacles to a seamless market with the goal of creating a large single and homogenous market. So, China is sticking to the major principles that have guided its development for 40 years and allowed it to become a highly competitive industrial power. The plan suggests that China will remain an even more formidable industrial power now with the intention of integrating all components of the value chain and not just production.
Other goals were also mentioned, such as continuing to decarbonate the economy and improving agriculture in order to limit China’s dependence on farm imports. No specific measures were mentioned to stabilise the real-estate market except one on improved housing.
The markets mostly shrugged off these announcements, as they had the meeting between presidents Donald Trump and Xi Jinping. In fact, they “sold the news”, as little of this came as a surprise. On the trade front, the summit meeting illustrates the intention to maintain dialogue and reach compromises, with each side having cards to play – agricultural produce and rare earths from the Chinese side, and tariff threats and semiconductor access on the US side. But this discussion also looks more like a “truce” than the end of the trade war.

BUY ON THE DIPS

We remain bullish on Chinese equities for the medium term despite their strong showing this year (they are up by about 25% in USD and 15% in euros). There is still some room for making up their discount at which they are trading, and earnings growth is trending upward. A short-term dip is possible, which will provide investment opportunities, particularly for diversifying away from US equities, which look fairly priced.

FIGURE OF THE MONTH

-10%

This is the reduction in average tariffs, from 57% to 47%, that the US now charges China after discussions between presidents Donald Trump and Xi Jinping.

PERFORMANCE OF THE “CHINA PROMINENT 10” AND “THE MAGNIFICIENT 7”

The “Magnificent 7” are the GAFAMs: Alphabet (Google), Amazon, Meta (Facebook), Apple and Microsoft, plus Nvidia and Tesla.*

The 10 most promising Chinese companies, the “China Prominent 10” are Tencent, Alibaba, Xiaomi, BYD, Meituan, NetEase, Mida, Hengrui Medecine, Trip.com (Ctrip) and Anta Sports.*

Source: Bloomberg as of 05/11/2025.

Completed on 12/11/2025