Taking profits on IT and the US
The year is off to a good start with positive returns for stock indices around, but cracks are surfacing. Given the current resilience of the world economy, we remain moderately positive towards equities and bonds. However, we are taking profits in our US and IT equity positioning, while increasing our positioning in Europe and the financials sector.
- IT: DeepSeek fuels uncertainty
- Europe vs US: a story of relative attractiveness
- Financials: room for growth
IT: DeepSeek fuels uncertainty
The IT sector performed very well in recent years with performance concentrated in semiconductors. The sector, however, has underperformed recently. Also driven by semiconductors. Demand, profits, and growth were high for a longer period, but there may be questions on the horizon. First, artificial intelligence (AI) has been immensely popular in recent years which has propped up demand. The main question now is when this will normalize or even decrease. A new AI model from Chinese developer DeepSeek has added to this uncertainty, since its model is more efficient than previous AI models. This could potentially decrease demand for computing power. In addition, the combination of high concentration and valuations within the sector increases the risk in our portfolio. Therefore, we are taking risk off the table by reducing our positioning in IT from a modest overweight to neutral.Given the large weight of the IT-sector, we also reduce our US positioning to neutral.
Europe vs US: a story of relative attractiveness
Europe’s relative position is improving. We see economic indicators in Europe slowly improving. Also, earnings dynamics are stabilising and that could make investors reconsider the large valuation gap between Europe and the US. This does not mean that risks, such as tariffs, are off the table for Europe. But its relative attractiveness is improving. Consequently, we are increasing our positioning to European equities from underweight to neutral.
Financials: room for growth
We continue to see positive developments for the financials sector, and as such, we are increasing our positioning in the sector from a modest overweight to overweight. Specifically, interest rates are projected to remain elevated due to fiscal policies, tariffs, and inflationary pressure in the US, potentially increasing net interest income through a steepening yield curve. Additionally, the sector shows positive momentum, while economic performance remains resilient and fee income and investment-banking activity are increasing. Finally, despite above-average valuations, some subsectors still offer attractive opportunities, justifying our stronger overweight positioning.
Conclusion
As uncertainty has appeared surrounding the semiconductors growth path in relation to AI, we take profits on the IT sector and the US. We use the proceeds to increase the positioning in the financials sector and in European stocks. All in all, we remain slightly overweight equities and bonds in our portfolio. Within bonds, we retain a preference for European high-quality bonds.
Richard de Groot
Chair Global Investment Committee