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The trade war is increasing uncertainty and systemic risks on the financial markets. The weighting of equities has been reduced to neutral, in favour of gold. The improvement in economic fundamentals is leading us to favour European equities.

In his recent update on the economic and financial outlook, Philipp E. Bärtschi (picture) (Chief Investment Officer at J. Safra Sarasin) highlighted the divergence that is beginning to emerge in the outlook for the major economies. In the US, he notes that economic data has begun to deteriorate in recent weeks, particularly in terms of new orders in the manufacturing sector, labour market data and the purchasing managers’ index for services.

“Although we started from a fairly high level, these figures seem to indicate a deterioration in the US economy. And the start of the trade war orchestrated by Donald Trump increases the risk that the manufacturing sector has already peaked”. It also points to the deterioration in household confidence in an environment marked by persistently high inflation. “Further negative surprises could fuel fears of a deeper slowdown”.

European preference

Conversely, the economic situation in Europe is showing more encouraging signs, pointing to a moderate recovery over the coming quarters. “Investor sentiment and household confidence have improved, while the recent German elections should improve the business climate. Spending in the defence sector is expected to rise sharply, providing a boost to the manufacturing sector”. And in China, the trend also seems to be improving, with credit accelerating and the property sector stabilising.

Against this backdrop, Philipp Bärtschi notes that equity markets have begun to factor in the impact of the Trump administration’s tariffs on profit margins, with the market reaction muted following the release of generally solid earnings for the fourth quarter of 2024. However, he points out that the Magnificent Seven (Amazon, NVidia, Alphabet, Tesla, Apple, Microsoft and Meta) have been weakened by the announcements about the model developed by DeepSeek, which highlighted China’s ambitions in the field of artificial intelligence.

He therefore believes that European equities should continue to be favoured over US equities for the time being, with fiscal policies now likely to have a positive impact on earnings prospects over the coming quarters. “We prefer defensive stocks to cyclicals, and value stocks to growth stocks, with a positioning that favours the Swiss market, which should be relatively insensitive to the risks associated with the trade war.

Corporate bonds

On the fixed-income markets, the risk is now clearly focused on inflation, which could remain higher than expected, with the number of expected cuts in the US key rate having fallen sharply since the start of the year. “While the latest economic data has allayed fears of a rate hike, persistent inflation and tariff announcements are major obstacles to further easing of US monetary policy”. And Philipp Bärtschi points out that a very sharp slowdown in the economy will be needed before the Federal Reserve eases its policy.

At European level, however, he believes that further rate cuts are likely over the next few months, and will support bond prices. He is particularly fond of medium-term bonds, whose yields should be able to absorb rises in long-term interest rates. “We remain neutral on corporate bonds, with a preference for high yield over investment grade debt.

Golden diversification

 “Since Donald Trump started the trade war, we have reduced our equity weighting to neutral, and we have maintained this positioning. At the same time, we continue to underweight the bond market, while overweighting cash and alternative classes (catastrophe bonds, commodities). One asset class that Philipp Bärtschi currently favours is gold, particularly given the increase in geopolitical and systemic risks. “At the same time, this asset should continue to benefit from strong demand from central banks”.

Frédéric Lejoint

Author Frédéric Lejoint

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