Macroeconomic Perspectives – A Complex Challenge for Central Banks
The US economy continues to grow steadily. Investments remain substantial, particularly in digital infrastructure, and consumer spending is proving resilient despite a slight cooling in the labor market. We expect core inflation to exceed 3% for most of the year due to the combined effects of US tariff policy, stricter immigration policy, and resilient domestic demand. Added to this is the risk of rising energy costs since the start of the Gulf War, which could push overall inflation higher. At the same time, rising fuel prices are weighing on consumption and leading to weaker growth. Due to these stagflationary trends, the Fed should proceed cautiously and implement only one further interest rate cut in 2026.
Growth in the eurozone has stabilized. Germany’s infrastructure and defense spending program is beginning to stimulate domestic demand, and the services sector continues to perform well. Inflation is expected to fall below 2% only temporarily, so the European Central Bank should keep key interest rates unchanged this year. With the recent rise in energy costs, markets now even expect an interest rate hike in the second half of the year. In our view, this is highly unlikely, as inflation risks appear low in the medium term.
In Switzerland, economic indicators and consumer confidence have improved. Inflation remains very low, but medium-term prospects suggest that the Swiss National Bank considers its current stance sufficiently accommodative. We therefore expect interest rates to remain at 0% for an extended period. Conversely, growth in the UK is slowing. Easing inflationary pressures and a weakening labor market should allow the Bank of England to proceed with further interest rate cuts despite the recent rise in energy costs. In Japan, Prime Minister Takaichi’s overwhelming victory in the lower house elections suggests that fiscal policy will remain expansionary. The combination of higher inflation, expansionary fiscal policy, and a weak yen will likely require further monetary tightening. Chinese growth is still supported by robust exports, as companies continue to diversify their trade flows away from the United States. However, domestic demand remains modest, and the real estate market is still adjusting after years of contraction.
Bonds – Various Factors Drive Ups and Downs
US Treasury yields fell in February due to increased uncertainty about the potential impact of AI and possible disruptions it could cause in the economic cycle and certain credit market segments. This had a similar effect on bond yields in the euro area, Japan, and the UK. With the outbreak of the Gulf War, the pendulum swung in the opposite direction. Suddenly, rising energy costs and growing inflation expectations seem to represent the greater risk. Whether this is only a short-term counter-move mainly depends on how long oil prices remain significantly higher. In the medium term, however, we see little chance of a rise or fall for long-term government bonds of Western countries.
In Japan, short-term government bond yields continue to trend upward, reflecting the prospect of further interest rate hikes, while long-term yields have slightly declined. Yield curves remain steep in most developed countries, and we favor medium-term maturities between five and seven years. Real yields remain attractive from a medium-term perspective. Despite a slight increase at the beginning of March, corporate bond spreads remain close to historic lows in both the investment-grade and high-yield segments. Tensions are increasingly evident in some parts of the private credit market, with particularly high exposure in sectors currently affected by concerns about AI-related disruptions. So far, the impact on traditional markets has been limited and will likely continue to be so as long as the economy continues to grow steadily. We maintain our neutral stance on corporate bonds overall, but this segment requires careful monitoring.
Stocks – The Environment Favors Emerging Markets
After a positive start to the year, some equity markets experienced a significant correction with the outbreak of the Gulf War. The biggest losers were previous winners such as Japan and emerging markets. Risk aversion increased significantly, and investor sentiment is tense. However, it may take a few more weeks before markets hit bottom. In our base scenario, we assume that energy prices will not remain permanently higher and that corporate earnings will therefore not be significantly impacted. Fundamentals for equities should remain positive, and trends should continue. We also expect a renewed weakening of the dollar in the medium term, which should favor money flows from US assets to emerging markets. The latter should continue to benefit from high investments in artificial intelligence and elevated metal prices. From a thematic perspective, we favor sectors that could benefit from increased investments in digital infrastructure.
Asset Allocation – Outlook Remains Positive for Risk Assets
Considering solid corporate earnings data with positive revisions and support from fiscal and monetary policies, we expect equity markets to remain lively in the coming quarters. Although the Gulf War is causing temporary volatility, it should not undermine positive economic prospects. Therefore, we maintain a slight overweight in equities and favor emerging markets. This is offset by an unchanged underweight in bonds. Overall, we see little chance of outperformance in this asset class. In fixed income, we favor emerging market bonds in the investment-grade segment and maintain a neutral weighting in high-yield bonds. We remain overweight in gold and commodities. Precious metals are not immune to setbacks but remain in a structural uptrend. Industrial commodities continue to be supported as macroeconomic data indicate increased demand for raw materials for industrial production. Oil prices are expected to remain volatile due to the war.
