Workout (E&S) | The macro versus micro fight

Research evidence excerpt

Workout (E&S) | The macro versus micro fight

The macro versus micro fight (3/3)

We make the following changes to our asset allocation:

−Our equity allocation remains unchanged at Neutral. Why not OW? Rising interest rates could weigh on the biggest

driver of the stock market. Why not UW? A deal between the US and Iran remains the most likely scenario, while

economic activity has so far proven resilient.

−We raise our European equity exposure (from N to OW) and reduce our US exposure (from N to UW).

−We further reduce our exposure to US treasuries in favour of cash.

• European equities’ relative attraction at this stage – in a nutshell:

−Sharp underperformance YTD, with the DAX/CAC revisiting interesting relative lows versus the US market.

−Less Tech and more Healthcare/Consumer exposure, making European equities better positioned to benefit if the

Iran crisis eases and/or if the AI trade consolidates.

−European macro dynamics are so far proving slightly more resilient than expected, although it’s still early days.

−Risks to long-duration bonds look higher in the US than in Europe, due to the more limited fiscal stimulus and more

contained inflation outlook.

−The EU trade agenda supporting European manufacturing should accelerate with the EU summit on 18/19 June.

−The German stimulus package should become more visible from 2027, and this is approaching investors’ time

horizon.

−That said, valuations of European equities are not particularly compelling relative to the US, as the equity risk

premium differential is back to pre-Covid levels. Admittedly, Europe offers a very decent and relatively secure

dividend yield, which remains a defensive feature. The equity asset class is now rather expensive overall. This is

especially true for large caps.