PERSPECTIVES
MARKET AND ALLOCATION
Our experts monthly overview
OUR CENTRAL SCENARIO
Deputy Chief Executive Officer,
Chief Investment Officer
OFI INVEST ASSET MANAGEMENT
A busy post-holiday period…
Despite the prevailing geopolitical and economic uncertainty, summer was actually rather quiet, in testimony to the markets’ growing resilience – some would say turning a blind eye – to various sources of volatility. Now that everyone is back at their desks, will this continue to be the case under less sunny skies?
Donald Trump’s assaults against the US Federal Reserve’s independence are worth watching but have not yet undermined the credibility of the European Central Bank. We expect the US economy to slow in the second half of the year to below its potential and the job market to worsen gradually. Inflation is likely to be driven up by customs tariffs – as things now stand – but not so much as to keep the Fed from lowering its interest rates on two occasions by yearend. In this context, we maintain our bullish view on long US bond yields at 4.25%. We believe any political interference with the Fed could lead to a steepening of the yield curve, or even a loss of confidence in long-term assets.
The euro zone economy has remained lacklustre, but we expect it to strengthen a bit in 2026, driven mainly by the German stimulus plans. And with inflation back to its target, the ECB is likely to leave its rates unchanged for an extended period.
In Europe, all eyes are on France, after a no-confidence vote brought down the government of François Bayrou and dashed hopes of a meaningful reduction in the public debt. This is likely to lead to a downgrade of France’s credit rating to “A” in the coming year, something that is already priced into its spread vs. Germany. Political developments could stoke volatility on this spread, but the tipping point, we believe, would be a potential resignation of President Emmanuel Macron. That would cancel out enough visibility with foreign creditors – who hold 55% of France’s debt – for them to look more closely not at their flows but at their stock of debt. This is not currently our conviction, and we are actually buyers of OATs on dips.
We are more circumspect on the credit market after two very strong years. Carry is still attractive in absolute terms, but spreads look very tight, and supply-side competition is increasingly keen from government bonds.
As for equities, after a strong showing by the US market during summer, we reiterate our neutral stance on Europe and the US, pending corrections and buying opportunities, while gradually anticipating 2026 earnings figures.
OUR VIEWS AS OF 09/09/2025
With the US markets focused mostly on jobs, the Fed and inflation, the 10-year US yield ended August at 4.22%, the same as at the start of July. Meanwhile, the Bund continued to inch upward, reaching the 2.70%/2.80% zone. We are sticking to our stances on government bond markets, including a positive bias on US rates. In France, upward pressures on interest rates are worth watching, but, barring a scenario of extreme risks, spreads should remain under control. Credit markets look expensive. We are keeping our cursors in place, due to interest-rate and carry components but we will wait for spreads to normalise before adding to exposure. We are now taking a very conservative approach while reducing portfolio risk.
Despite higher yields on the long end of the curve, particularly in Europe, the equity markets continued to post gains on the whole, albeit more so in the US than in Europe. Indices rode the strength of corporate earnings, mainly those of companies connected to varying degrees to artificial intelligence. At this point, they are pricing in little or no risk premium, and we therefore see little upside potential for the coming weeks. This is why we are leaving our cursor at neutrality. Geographically, we believe that Chinese equities – which look reasonably priced in relative terms – could continue to move up. In the coming weeks, it will be important to keep an eye on developments in the Trump-Fed power-play, as well as renewed political instability in French domestic politics, which could spill over into the rest of Europe.
We reiterate our natural stance on the EUR/USD exchange rate, for several reasons: i/ monetary policy anticipations are rather well priced in on both sides of the Atlantic; ii/ most of the euro’s gains, driven mainly by the fiscal paradigm shift in Germany, are behind us; but ii/ the dollar continues to be squeezed by the unprecedented pressure that the US president is exerting on the US Federal Reserve.
Past performances are not a reliable indicator of future performances.
MACROECONOMIC VIEW
French politics in the spotlight
Head of Macroeconomic Research
and Strategy
OFI INVEST ASSET MANAGEMENT
Summer was relatively quiet on the markets, despite tariff noise and Donald Trump’s unprecedented interference with the US Federal Reserve, culminating in the attempted firing of a Fed governor, Lisa Cook. In France, political risk resurfaced, hitting mainly French assets, after Prime Minister François Bayrou’s decision to call for a vote of confidence. This new political instability could have three consequences: i) a less ambitious fiscal trajectory, with a budget deficit that will probably amount to 5% of GDP in 2026, the euro zone’s highest; ii) growth hemmed in by political uncertainty; iii) an even more likely ratings agencies downgrade of France to simple ‘A’ in the medium term. The first of three agencies to weigh in will be Fitch, on 12 September. Stabilising debt by 2030 would require about 100 billion euros in cumulative fiscal adjustments over the next five years (all other things being equal), which would be unprecedented. That said, while the markets regard the OAT/Bund spread as a “relative” parameter of country risk premium, the absolute level of interest rates is still the decisive factor in debt sustainability.
So, the global context over the coming quarters will be just as important to interest-rate trends as the domestic context and growth, and central banks’ accommodative bias is likely to help keep bond yields down.
AGAINST A BACKDROP OF MODERATE GROWTH AND INFLATION, THE ECB ON STANDBY…
In the euro zone, growth is expected to remain moderate, at about 1% in 2025, with private consumption slightly positive and investments undermined until now but that should begin to take off again next year, driven by stimulus plans. With inflation at about 2%, we see no reason for the BCE to cut rates into accommodative territory, but its stance will remain accommodative.
…WHILE THE FED WILL RESUME CUTTING IN SEPTEMBER
After showing some resilience in the third quarter, the US economy is likely to expand under its potential in the second half of the year, with household consumption and business investment undermined by tariffs. In 2026, domestic demand, business investment in particular, is likely to benefit from tax incentives laid out in the federal budget in the amount of 920 billion dollars over the next decade.
Meanwhile, according to revised second-quarter figures, investments in artificial intelligence were even greater and masked a more sluggish picture in other sectors, residential property in particular. The slowdown so far this year in leisure services, which are very sensitive to the economic cycle, confirms that domestic demand is likely to continue weakening on the whole for the rest of the year. This would be due mainly to tariff-driven price hikes that are expected to continue in the coming months. To protect consumption, the impact of tariffs must be balanced between margins (which would decrease) and prices (which would increase), to keep inflation from moving even higher above 3%. Our forecasts assume that about two thirds of increased tariffs will be passed on into prices.
The job market is another key variable for consumption. Some data back the idea that demand for labour could weaken. For example, wage growth of persons who change jobs is weaker than it is for persons who don’t – the opposite of what is seen on a robust active job market. However, other data suggest that this is due rather to a supply-side decrease in employment, due to the new migration policy and that’s why the jobless rate has remained relatively stable.
How fast and by how much the Fed lowers rates will be data-driven. A rapid worsening in the job market would speed up easing; otherwise, rate cuts will be gradual.
INTEREST RATES
The Fed in a squeeze; France in a stalemate
Co-CIO, Mutual Funds
OFI INVEST ASSET MANAGEMENT
The markets continued to rally this summer. Neither tariffs, nor corporate earnings disrupted corporate bond yields or spreads. Even statements by the US president, who has been very active on the international stage, had little impact. What did however, have an impact, was his determination to intervene in setting the US Federal Reserve’s monetary policy. The issue of Fed independence has been raised in particular since Trump has sought to dismiss Lisa Cook, a Joe Biden appointee. Confirmation by the courts would swing a majority of the Fed members to Trump’s camp, such as the recent appointees Michelle Bowman, Christopher Waller, and Stephen Miran (still to be confirmed). This could mean sooner cuts in short-term rates, making it easier to refinance US debt and weaken the dollar.
Against this backdrop, the Jackson Hole speech by the Fed chairman was surprisingly cautious, mentioning the risks to jobs and suggesting a rate cut could come as early as September.
And yet, this had little impact on the market anticipations, which are pricing in one rate cut in September, another one in December, and then three others in 2026. This would move the Fed Funds rate from 4.50% to about 3.00/3.25%, which Donald Trump – who calls Powell “Mister Too Late”(1) – still thinks is too high. However, these rate cuts, which may look like a good way to keep the economy going strong, should be kept in perspective, given the stubbornness of inflation.
During the review period, the yield curve did steepen, as short-term rates fell while the 10-year US yield stayed above 4.20%. Even so, we expect the T-Note to fall in the medium term and that any one-off increases could be used to extend portfolio duration.
FRANCE: A BUDGET STALEMATE
France is facing a budget showdown against a backdrop of a likely change in prime minister. François Bayrou’s announcement of a vote of confidence on 8 September triggered a widening in the France- Germany spread from 65 to 80 basis points on 10-year paper. Barring an extreme scenario (such as Emmanuel Macron’s resigning as president), growth forecasts at the euro zone scale are unlikely to be affected by French politics. The ECB is therefore likely to keep its key rate at 2% in the coming quarters, while the 10-year German yield, at around 2.75%, looks consistent with fundamentals. Upward movements in euro interest rates could also be exploited to extend durations.
The France/Germany spread will depend on various scenarios. In a baseline scenario, a new French prime minister without a dissolution of the National Assembly and with a Fitch downgrade, the spread should stay below 90 basis points. A dissolution could push it even higher. The absolute level of French yields is also worth keeping an eye on. The 10-year OAT is approaching 3.60%, which is automatically raising the cost of debt. Any political developments will therefore be worth watching in the coming weeks, with perhaps some opportunities for investors looking for yield on longterm maturities.
CREDIT: THE TREE THAT HIDES THE FOREST
The credit market looks expensive despite yields that remain attractive (3% in investment grade and 5% in high yield). Spreads are indeed close to their 20-year lows. This resilience is due mostly to abundant liquidity. Company results were reassuring, but future uncertainties do not appear to be priced into spreads. We are therefore taking a more cautious stance in reducing portfolio risk. Nevertheless, with its high yields, the asset class offers downside protection over a period of 12 months. So high spreads are being masked by rates that remain high, so the tree that hides the forest.
The widening of the 10-year OAT-Bund spread in August.
| BOND INDICES WITH COUPONS REINVESTED | AUGUST 2025 | YTD |
|---|---|---|
| JPM Emu | -0,44% | -0,03% |
| Bloomberg Barclays Euro Aggregate Corp | 0,02% | 2,36% |
| Bloomberg Barclays Pan European High Yield in euro | 0,26% | 3,73% |
EQUITIES
A good run this summer for US equities!
Co-CIO, Mutual Funds
OFI INVEST ASSET MANAGEMENT
The US market made up a good part of its lag behind European markets, driven by an earnings season that beat even the most optimistic forecasts. Whereas in late June 2025 the consensus of analysts was forecasting 5% to 6% earnings per share growth one-year out, US companies ended up delivering double that. Granted, forecasts were conservative, pending the impact of tariffs on companies’ bottom lines. But no one was truly expecting earnings growth of 11%, driven by 7% increase in revenues, all against a backdrop of economic slowdown. True, tech companies alone accounted for half of the earnings growth of S&P 500 companies in the second quarter of 2025. Far from slowing, artificial intelligence investments are accelerating even faster in the United States, with many companies having raised their projected spending for 2025. And investors cheered evidence that such spending is being monetised, such as in the cases of Microsoft* or Alphabet* – coming as a relief to investors concerned about the amounts already invested.
SURPRISINGLY STRONG US CORPORATE EARNINGS
The impact of tariffs has thus far been contained, but this will be an issue in the second half of the year.
Although companies have reiterated their full-year growth guidance for 2025, tariff barriers and their impacts on margins and volumes do give pause. Once rainy-day inventories have been used up, it will be a hard task keeping margins at these record levels, given the significant increase in buying prices. This will put two assumptions to the test: either US companies will raise their prices (once again), or they will have to rein in costs, which could mean job losses. In both cases, household consumption could take a hit. And this is the scenario that the US market seems to be pricing in, with consumption-exposed sectors bringing up the rear of performances this year.
EUROPE LAGGING BEHIND
European companies’ financial performances, in contrast, fell short of forecasts. The dollar’s depreciation during the period “consumed” the first half’s earnings growth, which ended up at 0. And we expect 2025 to be another lost year, with no earnings growth, like 2024. The markets continue to bet on the roll-out of European stimulus plans, the German one in particular, to breathe some life into the euro zone economy. Meanwhile, the French psychodrama is getting started once again, squeezing financial and domestic stocks. The contagion will probably be limited, but investors will obviously be focused on the OATBund spread in the coming weeks.
CHINA IS BACK
China is turning in one of the world’s top equity performances this year. Investors do not seem overly concerned about the game of chicken it is playing with the Trump administration. True, China has a number of cards in its hands. Economic growth is under pressure but resilient. The government is administering a skilful dose of proactive fiscal policy via targeted stimulus plans and monetary easing. China is also seeking to strengthen its influence in Asia, helped along in this effort by the shock triggered by Donald Trump and his tariffs imposed on all of Asia. From there, it’s not a long trip to assuming that China could be the big winner of this episode.
Clearly, investors have been burned buy the hedges they set up for political, geopolitical, health, climate and other risks and have decided to no longer price in a risk premium into their equity market valuations. They are now going on interest rates and company earnings alone. Against this backdrop, we see no strong upside potential on the markets in the short term and are accordingly reiterating our neutral stance, while overweighting Chinese equities for the aforementioned reasons.
The amount of US share buybacks this year, an all-time record.
| EQUITY INDICES WITH NET DIVIDENDS REINVESTED, IN LOCAL CURRENCIES | AUGUST 2025 | YTD |
|---|---|---|
| CAC 40 | -0,88% | 6,68% |
| EuroStoxx | 0,31% | 14,88% |
| S&P 500 in dollars | 1,99% | 10,50% |
| MSCI AC World in dollars | 2,47% | 14,30% |
EMERGING MARKETS
October plenum expected to confirm China’s pro-business turn
Chief Executive Officer
SYNCICAP ASSET MANAGEMENT
The Politburo this summer has reaffirmed the government’s new pro-business turn. The 15th five-year plan, which will be discussed at the October plenum, is expected to confirm this shift and provide some indications on China’s major issues.
2025 HAS SO FAR BEEN RATHER ENCOURAGING IN CHINA
First-half growth was satisfactory, and China is on its way to meeting its fullyear target of about 5%. Meanwhile, international investors are gradually moving back into Chinese equities, and recent performances are likely to encourage them to continue doing so. The MSCI China All Shares, for example, is up by 27% in dollars (+13% in euros).
The image of Chinese companies is indeed changing. The DeepSeek(2) episode early this year struck a chord, serving as a reminder that over the past five to 10 years, China has undergone profound changes for the better. It has become one of the most competitive countries on price and quality in almost all manufacturing sectors and a global leader in several of them, including humanoid robotics, electrical vehicles, biotech, solar power, drones, etc.
Investors are beginning to catch on, and market valuations, which are rather low on the whole, should continue to drive this upward trend. At a 2025 P/E of 13x, Chinese equities do indeed look rather undervalued compared to US stocks. This is due to a political risk premium that was justified in 2020 and 2021, years that saw a regulatory wave that weighed heavily on business morale.
THE GOVERNMENT HAS TAKEN A HEALTHY PRO-BUSINESS TURN
In the longer term, however, China faces some major challenges. It is against this backdrop that the findings of the October plenum are eagerly awaited. We see four main challenges:
- Managing overcapacities. China has long faced overcapacity in manufacturing, in particular in heavy industries such as steelmaking and coal, as well as in automaking and others. Its overcapacities are a concern for other countries, particularly in Europe, as Chinese goods will be competitive even with tariffs.
- Boosting the birthrate. The number of births has almost halved in less than 10 years, from almost 15 million to 8 million currently. China is ageing before it has achieved “common prosperity”. Childcare subsidies will be paid out for children until the age of three years (about USD 500). Some cities have adopted a 45-hour work week. And so on. A comprehensive ambitious plan is awaited.
- Boost domestic consumption. This is the most important challenge for China in freeing itself of excessive dependence on exports and creating a large domestic market able to absorb the most advanced goods and technologies that it produces. There is huge potential here, along with a huge store of household savings. Record amounts are held on term deposit accounts, even as interest rates have fallen – a sign of the current lack of confidence. New measures will therefore be needed, first to stabilise the real-estate market and then to create a viable pension financing system (by introducing a funded component), to strengthen social safety net, etc. Equity market gains are good news from this point of view and are being welcomed by the authorities.
- Reform state enterprises to make them more competitive and less bureaucratic.
Ultimately, we expect this 15th fiveyear plan to provide a clear path towards a China that is pro-business, pro-innovation, and pro-privatesector and less dogmatic. If so, the Chinese equity market could post further gains, with a significant rerating potential.
The number of industrial robots installed in China in 2024, up by 5%, vs. 7% and 9% declines in Japan and the US, respectively. China accounted for 54% of all global robot installations in 2024.
S&P 500 AND MSCI CHINA ALL SHARES (in USD)
Completed on 09/09/2025
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.
OAT (Obligation Assimilable du Trésor): French government bonds used as a benchmark for fixed-rate corporate bonds.
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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