Laurent Denize, Global Co-CIO ODDO BHF Asset Management.
“We remain constructive on equities, with a particular focus on secular growth themes such as AI and the ecological transition. At the same time, we are adapting our portfolios to account for the new interest rate cycle.”
As with a sweltering summer afternoon when thunderstorms occasionally break out without altering the long-term weather pattern, this summer has been similarly turbulent for the capital markets. Risky assets have experienced broad gains since the beginning of the year, but tensions mounted, culminating in a sharp market decline in early August. This turbulence was sparked by a combination of increasing recession fears in the US and a surprise interest rate hike in Japan, which rattled carry trade operators. Equity volatility surged, with the VIX spiking above 65. However, central banks in both the US and Japan acted swiftly to contain the sell-off through effective communication, and major market indices quickly bounced back to record highs on the prospect of rate cuts.
Despite this recovery, the underlying imbalances contributing to market fragility remain unresolved. Beyond technology stocks, valuations seem reasonable—though this holds true only if lofty earnings expectations can be met. Should economic slowdown signals intensify, volatility could resurface quickly, as seen in early September. Jittery market sentiment is likely to persist into the fall.
Our Take for the Next Four Months: Soft Landing, Disinflation, Rate Cuts and Politics
1. Soft Landing: Slower Growth, No Recession
The global economy is showing signs of deceleration, but a full-scale recession seems to be off the table. Major economies are recalibrating after aggressive tightening policies, and while consumer demand has weakened slightly, there remains enough momentum to avoid a contraction. That is why we are the “soft-landing” camp, despite this not being the most common case after a period of rate hikes. It is also worth mentioning that the balance of risks has recently shifted for the Eurozone with strong 2025e GDP revisions (+1.3%).
2. Disinflation: Prices Easing Gradually
Inflation, once the central concern of global markets, appears to be easing (less than 2% expected for both US and Eurozone in 2025). This gradual reduction in inflationary pressures reflects a cooling of post-pandemic demand, improved supply chains, and central banks’ efforts to rein in prices through higher interest rates. For consumers and businesses alike, this easing pressure offers a respite from soaring costs.
3. Rate Cuts: A Dovish Turn for Central Banks
With inflation seemingly under control, many central banks are shifting to a more dovish stance helped by an adequate cooling of the labor market.
Investors should prepare for this change in policy, as it could significantly affect bond markets, borrowing costs, and capital allocation strategies. Lower rates are historically favorable for equity markets, as they encourage borrowing and investment.
4. Politics: Risks on the Rise
The political environment is increasingly volatile, adding another layer of complexity to market dynamics. In the US, an election year looms, which could lead to increased market uncertainty. If both candidates’ fiscal measures would deepen the federal budget deficit, the US election risk is more on Trump (trade tensions, inflationary measures, independency of the FED…). In Europe, political fragmentation within the Eurozone poses challenges, while geopolitical tensions in the Middle East remain a perennial risk. Investors must keep a close eye on these developments, as geopolitical shocks can quickly disrupt economic stability and lead to sharp market corrections. The interplay between these political risks and economic fundamentals will be crucial in determining future market trends.
