Monthly House Views - A "Whatever it takes" German version

Uncertainties regarding the US economy
Economic indicators have clearly decelerated in the United States, with a slowdown in business surveys and an increase in price expectations. At this stage, this change in tone can be explained more by the uncertainty generated by the new administration's policy announcements than by the policies themselves. If President Trump has postponed the implementation of certain tariffs, the threats remain real. At the same time, uncertainty is increasing on the fiscal policy side with the stated intent of rapid federal spending cuts (DOGE) and fears of a shutdown in the context of polarising budget discussions.
 
We continue to believe that the fundamentals of the US economy remain supportive, with a still robust balance sheet of households and corporates and a tight labour market. However, the risks of tipping over to a less favourable scenario are increasing, with a potentially marked slowdown in activity and higher inflation. In this context, the Federal Reserve would maintain a cautious stance.
 
Europe is rearming
In response to the changing trade and geopolitical context, Europe is multiplying its announcements of greater fiscal support. First of all, the European Union has announced a marked increase in defence spending, mobilising up to 800 billion euros (up to 4.5% of GDP over 4 years). Then, the new German Chancellor Mertz had his "whatever it takes" moment, announcing  a massive public spending plan on defence and infrastructure (which could represent up to 3.5% of GDP per year). This announcement constitutes a real shift in German politics, with an explicit reference to Mario Draghi's announcements at the head of the ECB in the midst of the public debt crisis (2012).
 
These massive supports announced in Europe and Germany would be favourable for economic activity, without posing a risk to inflation in the short term. Thus, while we continue to expect the ECB to lower its short-term rates, long-term rates could remain under pressure due to larger bond issuance.

China economic announcements
The Chinese economy remains fragile, with a depressed real estate market and sluggish household consumption. In addition, exports, the main driver of growth, are threatened by US restrictive trade policies. In this context, the Chinese authorities have announced a stimulus plan of around 1.5% of GDP, focusing on consumption and real estate and with an economic growth target of 5% in 2025. The Chinese authorities are expected to continue to detail their plan to support domestic demand in the coming weeks.

We are adapting our strategic positioning
Turbulent financial markets. The accumulation of recent economic and political events has made the markets nervous since the beginning of the year. While the European and Chinese equity markets are performing well, the US market declined, in particular due to the correction in IT stocks. On the bond markets, long-term rates fell in the United States, illustrating the fact that the market participants are pricing in a scenario of a marked slowdown in activity in the US. At the same time, European long-term bond yields rose sharply, returning to their 2023 highs.

We are rebalancing our exposures. Indeed, while we remain overweight to equity markets overall, we are reducing our exposure to the US market, with a more cautious, large-cap and blended positioning.
In addition, we are moving to equilibrium stance in emerging markets, particularly China, which will allow us to benefit from the current favourable momentum in this market. In addition, given the specific uncertainties in the US economy and markets, we are reducing our overweight on the dollar towards equilibrium versus European currencies.
Finally, we are increasing our exposure to gold, as the geopolitical context and rising inflationary pressures remain favourable for gold.

We confirm our positive view on Europe. We are maintaining our overweight to equity markets, which we had already strengthened. However, we are reducing our exposure to European sovereign bonds, in a scenario of a steepening yield curve.

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