The current geopolitical tensions are creating a major macro shock by disrupting key points of global trade, including the Strait of Hormuz, with a clear risk of escalation. Despite this pressure, markets have so far shown resilience but remain highly volatile. The evolution of the situation will largely depend on the transitional nature of this shock or its drift towards a more sustainable scenario of stagflationary pressures.
Overview Global growth remains strong in the main regions of the world, driven in particular by particularly vigorous nominal dynamics in the United States. These dynamics continue to benefit fully from fiscal impulses and investments related to AI, which remain powerful drivers. The global cycle remains in expansion phase, but dispersion is intensifying as geopolitical fragmentation and strategic trade tensions take the forefront. We anticipate that the US economy will run at full speed until 2026, supported by investments, fiscal impetus, and wealth effects, with the risk of stronger growth than currently anticipated. The European economy remains more moderate but shows early signs of fiscal traction, especially in Germany, while China continues its controlled stabilization trajectory. We continue to favor emerging markets over developed markets, due to the resilience of their growth, improving inflation dynamics, attractive valuations, and the likely appreciation of the US dollar in the medium term.
Actions We maintain a positive view on equities, which benefit from strong earnings performance and policy support. In the United States, earnings continue to expand beyond large-cap companies, but valuations remain high and leaders are concentrated. We prefer exposure through structural themes such as modernization of electrical networks, electrification, and a selection of high-quality growth stocks. We continue to favor Japanese equities, especially mid-caps, where earnings growth and corporate reform dynamics remain strong. In emerging markets, we continue to overweight South Korea, South Africa, Greece, and Brazil, thanks to earnings revisions, reform dynamics, and attractive valuations.
Credit We remain cautious overall regarding credit. Investment grade spreads are exceptionally tight and only marginally compensate for duration and liquidity risk. Increased issuances, particularly in the United States, and late-cycle dynamics limit the upside potential. High yield continues to offer a more attractive carry, and default expectations remain moderate, but we mainly view it as an income opportunity rather than a bet on spread tightening. Within emerging markets, we prefer selective exposure in strong currencies and identify better relative values in local currency markets, especially where real yields remain high and central banks are credible.
Government Bonds We have become more constructive on duration compared to the end of 2025, as inflation is becoming better contained and government bonds are regaining some of their diversification value, although this evolution is not uniform across different markets. We prefer certain emerging markets in local currency where real yields are attractive and policy credibility is improving. The evolution of fiscal situation remains a key determinant of term premiums globally, and the impacts of Japanese and American policies must still be closely monitored.
[Context: The article discusses the impact of geopolitical tensions on global trade and the resilience of markets amid uncertainty. It also provides insights into different asset classes such as equities, credit, and government bonds.]
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