We remain tactically NEUTRAL on global equities.
The MSCI AC World index has fallen 7% from its February peak, weighed down by growing concerns over a more severe US slowdown than initially expected. Moving forward, we anticipate these downward pressures to ease, with the major indices likely to rebound, supported by solid fundamentals and light investor positioning. However, volatility is expected to remain elevated as investors assess downside risks linked to the sustainability of corporate margins, against the potential upside from a possible de-escalation of Trump's Trade War rhetoric, new financial deregulation measures, and fiscal easing.
Regionally, we maintain a LONG position on Europe, despite its strong performance since early December and the fact that positioning is no longer light. We expect the rally to continue, driven by improving earnings revisions, a better-than-expected macro environment (with the CESI steadily improving), and supportive fiscal measures following the German election. Additionally, Europe remains relatively cheap compared to other regions. We upgrade the UK to NEUTRAL (from SHORT) due to its shift towards defensive sectors. We remain NEUTRAL on US, as its main benchmark is now in oversold territory following the steepest derating since COVID. Our view on EM remains NEUTRAL, while we hold a SHORT position on Japan.
At the sector level, we have adjusted our previous Cyclical stance, now recommending a barbell strategy that includes both styles and market beta (as opposed to the previous Cyclical tilt and Neutral positioning between Growth and Value). Within Cyclicals, we continue to be engaged in Growth sectors like Semiconductors, Software and Media, expecting them to rebound from the recent sell-off, while remaining LONG on Value names like Banks and Financial Services. We are now more selective with the Magnificent 7. In Defensive sectors, we continue to favour Pharma, Biotech and Life Sciences, and we have shifted to a LONG position on Telecoms (from SHORT).
Strategically, we remain OVERWEIGHT, holding the view that the US economy will avoid a recession this year. While the downside risks to growth are rising, a more dovish Fed should offer support to the more rate-sensitive parts of the asset class. We now adopt a more agnostic stance, with no strong regional or sectoral bias (shifting away from the previous US tilt and Quality/Growth preference). We await more clarity on the next round of tariffs, set to be announced in April, and on the fiscal policies from both sides of the Atlantic. Should the infrastructure and military spending plans proposed by the new German Government and the European Union (including the UK) come to fruition, we would favour Europe over the US, expecting it to narrow its historical valuation gap and continue to outperform.
Cosimo Recchia
Senior Equity Strategist
Investment Research
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