Alexandre Drabowicz

Over the summer, we tactically increased our overweight to equities through the US, especially in our dynamic portfolios. We continued to accentuate our preference for US equities at the expense of the eurozone. We also believe the rally in US equities could continue through a broadening of performance to other sectors of the stock market (ie excluding the Magnificent Seven). In particular, we strengthened our conviction in US small- and mid-cap stocks ahead of the US election. The latter should benefit from a favourable macroeconomic environment, easing of financial conditions notably through continued rate cuts, and is likely to be supported by domestic-oriented policy measures. We have also increased our exposure to emerging equities: in addition to a resilient global growth environment, recent stimulus measures by the Chinese authorities offer significant upside potential in an already undervalued market.

In our fixed income buckets, after reducing our interest-rate sensitivity in August, we took advantage of the rise in long-term rates in November to neutralise our duration against our benchmark, especially in dollar-denominated mandates by buying back US government bonds. Finally, we increased our exposure to the US dollar at the start of Q3 when market pricing for rate cuts was exaggerated. We continue to consider the greenback as the best macro hedge against geopolitical risks and possible tariff war rhetoric.

We expect the US equity supremacy to continue next year, especially versus the rest of the world. Beyond the more buoyant macroeconomic environment, corporate fundamentals remain better oriented across the Atlantic, while the Trump administration’s pro-business policy measures, although partially priced in, could be an additional catalyst for performance. Our biggest conviction over the next quarters are profitable small and mid-caps, which in our view represent the sweet spot of the US equity markets: low valuations, a double-digit catch-up potential and high sensitivity to growth and falling interest rates.

Within credit, despite tight spreads, we are keeping our constructive stance on high-quality corporate debt, especially as we do not forecast any sharp macroeconomic slowdown in the near term while companies continue to record sound fundamentals. As such, the asset class should keep delivering attractive risk/reward returns, notably benefiting from supportive demand/supply dynamics.

Among our contrarian calls, we continue to hold listed European real estate equities. Despite having underperformed over recent months due to the rise of long-term interest rates, the ongoing rate cut cycle should act as a catalyst for the sector, which still records historical low valuations and a massive discount against physical real estate.

America Facing its Fractures, Amy Greene