Investment Strategy: Equity markets closing in on new all-time highs

Bond markets are showing mixed signals. On the one hand, the US term premium has risen since ‘Liberation Day’, leading to higher long term Treasury yields. This is primarily driven by a growing lack of confidence among investors regarding the US government policy. Here, Trump’s ‘Big, beautiful bill’, is not helping the case of the US as it would further increase the US deficit. The opposite of what investors want.

On the other hand, credit spreads came down further as financial markets relaxed after fears of a trade war driven recession faded. Currently, we prefer European high-quality bonds and remain cautious on riskier bonds, like high-yield bonds. Our stance on high-yield bonds will become more constructive, when credit spreads were to widen again thereby providing an opportunity.

Finally, we expect the difference between US and Eurozone yields to grow. The Federal Reserve (Fed) is forced to keep interest rates higher due to inflation fears, while the European Central Bank (ECB) has room to stimulate. This underscores our preference for European bonds.

Equity markets have experienced a swift V-shaped recovery driven by tariff de-escalation and a strong earnings season. Now, major indices are closing in on or at all-time highs with strong momentum. However, the dollar has kept falling, which causes US equities to still be down from a euro standpoint. Our shift from US to European equities earlier this year helped to alleviate this impact slightly.

Looking forward, investors are currently assuming that de-escalation will continue, but the deadline for trade deals is approaching quickly. We are not fully convinced that the recent de-escalation will continue, and we believe that a scenario of economic slowdown should not be ignored. Therefore, we are hesitant to increase our equity allocation at current price levels and prefer to remain neutral.

The conflict between Israel and Iran has led to a further increase in the gold price as investors turned to safety. Additionally, the strategic tailwinds that led us to include gold in our portfolio persist. These include central bank buying and gold’s status as an uncertainty hedge.

Israel’s attack on Iran’s nuclear program has also led to significant moves in oil prices. This sharp increase can have a dampening effect on economic growth while possibly increasing inflation. Higher oil prices are felt in every part of the economy. From manufacturing and transportation to the purchasing power of consumers. Although it is important to be aware of this spike in oil prices, they were at extraordinarily low levels before. Therefore, the impact on the world economy is limited for now. It is also unclear at this stage if oil prices remain at these higher levels.

Both equity and bond markets around the world have recovered further in recent weeks as the economic picture brightened. However, we are not fully convinced that de-escalation will continue and rising tensions in the Middle East add to global uncertainty. Therefore, we keep our positioning unchanged with a neutral equity positioning and modest overweight fixed income positioning with a focus on European quality. Finally, we keep our position in gold as the commodity continues to experience tailwinds.

Richard de Groot
Chair Global Investment Committee