Cross Asset Investment Strategy - December 2025

• The short-term economic recovery faces some risks. Germany is experiencing a phase of structural stagnation after weak growth in 2025 and two preceding years of recession, with industry and exports in crisis. A large fiscal pivot — a €500bn off‑budget fund and extra borrowing for defence — aims to rebalance the economy and boost demand from 2026. In the longer term, we believe that reforms could enable stronger expansion from 2027 if they are accelerated decisively.

• We believe German equities have room to continue to deliver attractive returns in 2026 and even outperform European equities. Markets should begin to price in an improving earnings outlook, supported by fiscal stimulus and monetary easing, fading tariff risks and a more benign FX backdrop. Industrials and Financials — the largest sectors — are likely to benefit from higher defence and infrastructure spending.

• European government bond supply is set to rise sharply in 2026 as large fiscal deficits -- particularly in Germany and France -- drive higher net issuance and gross issuance near €1.4 trillion, raising refinancing costs, especially on five‑year paper. ECB quantitative tightening will reduce its purchases, making net‑net issuance the largest on record and materially increasing the free float. 

• Continued euro‑denominated public issuance, a possible shift towards short-dated bills, and stronger demand from repatriating European investors, insurers and pension funds could absorb much of the extra supply. Country impacts will vary, with Germany the largest nominally and smaller markets facing bigger increases.

A breather after buoyant markets

The year is drawing to a close with most risk assets in positive territory, and global stocks and metal prices seeing multiple highs. Even the longest US government shutdown in history didn’t curb market enthusiasm. We think markets have been looking through the weakness in the belief that monetary and fiscal policy levers will be available for support, that profitability of AI investments is almost a given, and that corporate earnings will continue to exceed expectations, following a strong results season in the US, somewhat less so in Europe. The tariffs’ impact on consumption is also largely being ignored.