PERSPECTIVES

OUR CENTRAL SCENARIO

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

Fed 1, Trump 0

After a nine-month status quo, the US Federal Reserve, as expected, lowered its key rates by one quarter of a point. It did so in response to an economic slowdown that is showing up in particular in a weak job market as well as to a modest, and no doubt temporary, uptick in inflation due to increased tariffs. Despite Donald Trump’s verbal assaults on the Fed’s independence and his nomination of Stephen Miran as governor, the Fed settled for a moderate cut, contrary to Trump’s wishes. Meanwhile, the Supreme Court suspended Trump’s dismissal of Fed governor Lisa Cook. We expect the Fed to continue lowering its rates steadily, by a total of about 1% by the end of next year, while tracking the economic slowdown. We’ll be keeping a close eye on attacks against its independence, particularly in early 2026.

The European Central Bank (ECB) sat this one out and appears to have reached the floor of its current easing cycle. Economic growth is holding at modest levels and is likely to tick up slightly in in 2026, driven by various support and stimulus plans.

The ECB could be pushed towards an additional cut by low inflation or by a more serious slowdown in growth due to the euro’s strength or tariffs.

France continues to grab headlines due to its political instability and uncertainties surrounding its budget and the reduction of the deficit. The ratings agency Fitch took note of these problems in downgrading France to A+, something we had expected for several months. Other agencies will probably follow suit in the coming months. France’s spread vs. Germany barely budged, as the markets had already priced in the rating changes. Beyond a bit of volatility, only a bombshell – if the French president were to resign, for example – would widen the spread significantly. The trajectory of deficits, and hence of long-term debt, does not look sustainable and must be rectified, preferably through reason than under pressure.

German sovereign yields continue to offer attractive carry trade opportunities around 2.75%, but we don’t see them moving down. We have therefore opted for neutrality. In the US, we are slightly overweight on the 10-year US yield, which we feel could benefit from the Fed’s easing cycle. On the credit market, we are more conservative, given how expensive spreads are in comparison with sovereign yields in particular in France.

In light of the equity markets’ solid performances on the year to date, we reiterate our neutral stance. Any market dips would be a good opportunity for adding to exposures, in particular pending a pricing in of 2026 earnings forecasts.

OUR VIEWS AS OF 07/10/2025

Despite a still heavy political and geopolitical backdrop, volatility on rates fell further in September. Our sovereign bond yields still look right on fundamentals. In the euro zone, we prefer to remain invested in countries offering carry trade opportunities. We continue to overweight US rates slightly, as they could get a boost from future US Federal Reserve rate cuts and stable inflation. On the credit markets, we are lowering our cursor by one notch in investment grade and high yield. Carry opportunities are still out there, but the spreads are too narrow. We therefore recommend selectiveness in this asset class in particular.

The Fed has begun a rate-easing cycle in support of US jobs and growth. This helped propel the S&P 500 to a fifth consecutive month of gains, driven by AI and the “Magnificent 7”⁽¹⁾, while other stocks underperformed. Momentum is still positive, but we believe that US equities are expensive at multiples of about 23 times earnings. In Europe, the economy is not especially buoyant for companies, but the outlook for 2026 is improving, and valuations are still lower than in the US, at 14 times earnings. We are keeping our cursors at neutral on US and European equities, pending a dip that would make us tactical buyers. We continue to prefer Japan, which could be boosted by fiscal momentum. We continue to overweight China and will be keeping a close eye on the Communist Party plenum, schedule for 20-23 October.

We are taking a neutral stance on the euro-dollar exchange rate. Although the general trend suggests that the dollar should remain stable at best vs. the euro in the medium term, factors in addition to fundamentals could drive short-term shifts. These include the already heavy short positions on the currency, which could cause a market turnabout, at least in a tactical manner.

MACROECONOMIC VIEW

The US economy shows how resilient it is

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

The US is likely, once again, to have achieved 3%-plus growth in the third quarter. Some of this was driven by foreign trade, thanks to reduced imports. Even so, domestic demand is likely to have remained robust in the third quarter, based on leading indicators, such as durable goods orders for business investment or retail sales for private consumption. However, we still see a slowdown in the coming months, as consumption is likely to be hit by tariffs and a stricter immigration policy. Moreover, the perception just keeps rising that it is increasingly difficult to find a job, particularly amidst less abundant job offers, which is in line with expectations of weaker consumption. This is especially true for less wealthy households, for which wage gains are weaker than for other households and which are hit harder by the combined effects of the budget passed this summer (OBBBA⁽²⁾) and tariffs, as seen in studies by the Congressional Budget Office (CBO) and Yale University.
That being said, the top two income quintiles account for just 20% of total consumption (see chart). As long as tariff-driven inflation remains temporary and relatively contained and offset in part by disinflation in housing, disposable real income and, hence, consumption, should hold steady on the whole.

TRADE UNCERTAINTY IS LIKELY TO FADE…

Most companies’ fundamentals remain solid, and a fading of traderelated uncertainty could restore the visibility that companies need to restart hiring and investment. Such momentum would also be driven by measures contained in the US budget passed this summer (OBBBA), which will take effect next year. More than 900 billion dollars is being allocated to companies, half of which to the manufacturing sector. Coming deregulation and monetary policy easing should take care of the rest by stimulating growth in the coming quarters.
Despite the lack of red alerts in high-frequence job data (in particular new initial jobless claims), the job market is without a doubt shakier, suggesting that, at the very least, the interval of confidence of forecasts should be widened. Readings have also been made more challenging by the fact that statistics have been held back by the temporary federal government shutdown⁽³⁾. We expect this to cause the Fed to lower its key rates another two times by yearend.

…BUT NOT POLITICAL UNCERTAINTY IN FRANCE

In France, the resignation of Prime Minister Sébastien Lecornu, who had promised to lower the deficit below 5% of GDP by 2026, lessens the chances of passing a budget by yearend. In the short term, the markets are unlikely to avert their gaze from France. Standard & Poor’s is likely to join Fitch (A+) no later than early 2026, and Moody’s (Aa3) should at a minimum lower its outlook from stable to negative, but the spread with Germany already prices in a simple A rating. The political situation continues to weigh on the morale of French economic agents and to widen the gap with business surveys in Germany, which are being driven by expectations for the coming stimulus plan.
That being said, the European economy has been more resilient this year than surveys had projected, driven by a few sectors and, at the country level, by Spain and Portugal in particular. Barring major changes, we expect growth to continue along these lines for the rest of the year; thereafter, stimulus plans and less uncertainty over trade should support the economy in 2026. Disinflation has been accomplished and, with rates at neutrality (2%), we believe that it is in the ECB’s interest to keep them unchanged and to retain some margin for manoeuvre in case of need.

Sources: Macrobond, Ofi Invest Asset Management as of 01/10/2025.

INTEREST RATES

Fed hawks now in winter rest

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

September was a turning point in US monetary policy. The Federal Reserve lowered its key rate by 25 basis points, to  4.25%, thereby beginning a new easing cycle after a nine-month status quo. Despite stubborn inflation, the markets cheered this move, which had been motivated by a weaker job market. We expect the Fed to lower its rates about another four times by the end of next year. Queries on the Fed’s independence were a key talking point and will remain so with the changes of governors coming early next year. As for longdated bonds, the 10-year US yield decreased slightly in September to around 4.15%. Based on Fed guidance and inflation, we feel this is an attractive zone for keeping a slightly overweight stance. In the euro zone, the ECB is keeping its key rate at 2%. With inflation now looking to be under control, we see no need for the ECB to take further action for the moment, pending evidence that the German stimulus plan is indeed spurring growth.
The Bund looks fairly priced at around 2.70%/2.75%, given the symmetric risks (both upward and downward) due over the coming months. A slightly higher yield (around 3%) would still be in line with our long-term assumptions and would not change our views on European rates. Quite the contrary, all things being equal, that would be a good point for increasing exposure…

SOVEREIGN DEBT AND RATINGS AGENCIES

…For, while sovereign bonds appear to offer little upside, they do offer carry trade opportunities to investors who can tolerate short- or medium volatility. France continues to grab headlines. Its political and fiscal uncertainty are a concern, and that has led to rating agency downgrades by Fitch (to A+ Stable) and DBRS⁽⁴⁾ (to AA Stable). Meanwhile, Spain, Portugal and Italy were upgraded by the agencies in recognition of their fiscal discipline. Despite these announcements, spreads barely budged on the month. The market had already priced in these changes, which many had deemed “belated” in light of the fundamentals. In other words, investors had already priced in the good news in peripheral countries and the bad news in France.
To see how confident investors are, we will be keeping an eye on upcoming debt issuance, even though the bond markets should be less busy during the last months of the year. The markets are already turning the page to 2026 and a January that is traditionally very busy. Net supply is expected to be historically heavy in the euro zone, particularly in Germany, which will be raising its volume of debt significantly. In the meantime, a temporary lull may provide the markets with some technical support.

CORPORATE BONDS ARE STILL VERY POPULAR

On the credit market, spreads narrowed further in September. Bonds from financial issuers, subordinated ones in particular, outperformed non-financial ones while defensive sectors underperformed slightly. Likewise, BB/B paper caught up with simple A and spreads hit historically narrow levels. Against this backdrop, we are sticking to a cautious approach on spreads and continue to adjust portfolio hedges, while taking a conservative approach in some sectors. Selectiveness remains the watchword.

EQUITIES

“Never say never”

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

The  US Federal Reserve has now joined the dance. Initial signs of weakness on the US job market ultimately overcame Jerome Powell’s determination. The markets are already pricing in that this change will be just the first of a new cycle of cuts that will support US economic growth and its companies’ earnings capacity.
According to a Bank of America survey, 58% of investors believe that global equities are currently overvalued, led by the US market, which is currently trading at a premium of more than 20% to its historical average and continues to catch up on its year-to-date performance with other global equity markets. It is still being driven by tech stocks, particularly those closely connected to artificial intelligence. US companies are increasingly profitable and compare very favourably with their European peers. They continue to outperform other developed markets on earnings growth. At more than 23 times 12-month-forward earnings, US markets are not cheap, especially as their performances are still uneven from sector to sector. The tech sector continues to be bloated, due lately to “incestuous” deals. One of these is Nvidia’s* plan to invest 100 billion dollars in Open AI* to allow Open AI to build datacentres equipped with chips from… Nvidia*. But, for the moment, the market don’t seem to care. The projects are huge and promise years of visibility on the investments of hyperscalers⁽⁵⁾. Only time will tell how profitable they will be.

MISLEADING PERFORMANCES

When excluding the “Magnificent 7”⁽⁶⁾, corporate America’s. economic and financial performances are still lacklustre. The same goes for the US economy, which, when excluding AI investments, would have been far less robust. The S&P 493 (i.e., the S&P 500 without the “Magnificent 7”) is now trading at more than 20 times earnings, whereas its projected earnings growth is just 5%. We see little room left for rerating in the US. Earnings growth will have to accelerate between now and yearend to provide the US market with further thrust. Economic data has worsened in Europe since early August, particularly in Germany. Manufacturers’ sentiment worsened in September against the backdrop of an unfavourable trade agreement signed with the US. Restructuring plans are being announced one after the other, such Bosch’s* with its 13,000 layoffs. The markets are nonetheless keeping an eye on German fiscal stimulus, expecting it to soon begin playing its role of supporting domestic demand. The improvement in euro zone financial conditions is also a good sign for the 2026 growth outlook. At 14 times earnings, the euro zone is no longer trading at a discount. Earnings growth will once again disappoint this year but we expect it to improve considerably next year.
We reiterate our neutral stance on US and European equities. We believe that they are fairly valued and see little prospect for an improvement in earnings between now and yearend. Meanwhile, after the very strong surge in recent weeks, we may return tactically to a more positive view upon any market dip. We remain more bullish on Japan, as it should get a boost from the prospect of fiscal expansion following early elections, as well as robust nominal growth. China remains well weighted in our allocations. The strong acceleration in new technologies is casting light on a large number of top-tier companies that will ultimately be able to rival their US peers.

EMERGING MARKETS

What comes next after the Chinese equity rally?

JEAN-MARIE MERCADAL
Chief Executive Officer
SYNCICAP ASSET MANAGEMENT

After several disappointing years, Chinese equities gained almost 25% in 2024 and are up more than 30% since the beginning of 2025 (+15% in euros). What’s behind this spectacular rally and what is now the best strategy?

This year’s rally in Chinese equities looks longer-lived than those of previous years, which featured spectacular spikes lasting a few weeks in the run-up to economic support policy decisions, followed by long phases of stagnation or declines. We see three main reasons for this positive configuration:
1/ We are in the middle of an acrossthe- board market rerating, driven by a dual realisation: a lower risk premium after President Xi Jinping received the heads of China’s main flagship companies early this year – an about-face after the regulatory crackdown of 2021. Meanwhile, the spectacular emergence of cutting-edge Chinese companies (DeepSeek* in AI, robotics, electric vehicles, etc.) have made the entire world aware of the quality and competitiveness of Chinese products.
2/ Investment flows are back: international investors had underweighted China by far in recent years. They can no longer afford to do so, and the fear of missing out on the rally has driven the bullish trend.

There is still some upside potential, as the latest statistics continue to point to a global underweighting of China. Domestic Chinese institutional investors have also been encouraged to buy in recent months, for two main reasons. First of all, they are beginning to lay the groundwork for pension funds to finance retirement payments, as the current, pay-go regime will be in big trouble within a decade due to the rapid worsening in China’s birthrate. The number of births per woman in China has fallen in five years from almost 1.8 to just 1! Moreover, the Chinese equity market appears to have become a lever for restoring the confidence of consumers hit hard by the drop in real-estate prices and for restarting domestic consumption, which is one of the government’s goals. Keep in mind that Chinese household savings are very abundant at almost 110% of GDP, including 70% in time deposits whose returns have fallen to just 1%. So, there is a very large reserve of potential investments in equities as the market rally begins to grab headlines once again.
3/ The equity rally is being driven by an improvement in fundamentals and corporate earnings. Earnings of onshore and offshore companies (i.e., listed in China and Hong Kong, respectively) rose by 3% and 6%, respectively, in the first half of the year. The latest revisions have been upward, particularly in the sectors of technologies and AI. Earnings on the whole are forecast to rise by 15% and 8% this year and by 12% and 11% next year.

BUY ON THE DIP

We advocate a buy-the-dip strategy. China is still far from having resolved its fundamental problems, with latent deflation lingering from the real-estate crisis and very serious manufacturing overcapacities that are likely to exacerbate price declines, even though the government is trying to resolve this problem through its “anti-involution” policy⁽⁷⁾. This is likely to cause a few bouts of volatility. Moreover, in the shorter term, some signs of technical “overheating” are showing up. But in the longer term, we don’t think Chinese equities have yet caught up, and upside potential of about 30% within 12 or 18 months looks possible.

FIGURE OF THE MONTH

+49%

The performance of the Hang Seng Tech index in 2025. Investors are buying into the Chinese government’s “self-reliance” strategy in the tech sector. The index is still 50% below its 2021 highs.

CHINA’S DOMINATION IN RARE EARTHS:
an important negotiating tool with the US. But it’s not the only one.

Source: US Geological Survey, as of end-2024

Completed on 07/10/2025