Crédit Mutuel AM: Asset Allocation Convictions
Today’s headlines are largely dominated by updates regarding the tariff war initiated by Donald Trump on April 2nd, otherwise referred to as “Liberation Day.” After Trump imposed excessive tariffs on all of its trading partners, he decided on a 90-day pause, giving in to pressure from bond markets.
Just after announcing a 50% tariff on the European Union, Trump quickly pushed implementation to July 9th, a further demonstration of his fickle decision making. Unfortunately, and moving forward, this is likely to become the norm.
For companies, this decision making has several direct consequences. First off, an increase in inventories. According to S&P Global and since they began their study 18 years ago, inventories are at all-time highs. High inventories have been beneficial for growth in recent months, but it also means that demand should weaken in the medium term.
Another direct consequence is that companies are cancelling or postponing their investments and hiring intentions. Finally, these same companies will have to choose between reducing margins or raising prices depending on their possibilities.
Recent Producer Price Index surveys (PPI) show that while prices are indeed rising in the goods sectors, they are falling in the services sectors, which in our opinion reflects ongoing margin contraction. The Federal Reserve will be confronted with opposing signals.
In the end, an inflationary environment should prevail, with inflation likely to rebound above 3% in the coming months. In this context, the Fed will have no other option but to wait for a significant deterioration in the labor market before acting, which translates into September at the earliest.
Another notable observation from recent months is the Unites States’ lack of fiscal discipline: possible tax cuts currently under discussion within the Senate are expected to further increase deficits, which are already close to 7%. With the projected increase in bond issuances and a debt burden that will intensify significantly in the coming years, any negative development could potentially destabilize U.S. bond markets. This would have adverse consequences on all risky asset classes, which is why this scenario is of great concern for us.
For the Eurozone and in line with expectations from a few months ago, the situation is more stable with slow growth expected for 2025. However, there are reasons for optimism in the long term. The decline in oil prices should have a positive effect on growth, subject to the usual 6–9-month lag. The rise in the Euro, combined with the drop in oil prices, will allow the ECB to continue its rate-cutting cycle if necessary. Additionally, it is impossible to ignore the very large fiscal stimulus plan announced by Germany.
In fact, if you combine the 500 billion Euro increase in infrastructure spending over 10 years and the Readiness 2030 plan, an additional 20% of GDP will be injected into the German economy over the next 10 years. The sum is colossal and should lead to improved growth prospects for Germany and, to a lesser extent, for the Eurozone in the coming years.
In today’s volatile markets, largely subjected to the whims of the US government, it seems difficult to deviate too strongly from our indices. However, we believe that downside risks dominate today: inventories will be depleted which should lead to disappointment regarding medium-term growth. At the same time, the continued rise in long-term interest rates, particularly in the United States, could negatively affect the valuation of risky assets. Therefore, a bit of caution is well warranted before the summer break.
