After a flurry of headlines and announcements from the annual World Economic Forum in Davos in January, one key message is likely to survive after most of the speeches have been long-forgotten; The world is facing a rupture in the international order.
Catching-up last week on her return from the meetings, Monica Defend, head of the Amundi Investment Institute, sat down with our host, Swaha Pattanaik, to share her observations from the ground and on how this rupture is likely to impact our economic research and investment views.
As policy, geopolitics and volatility drive the market cycle, we look at what this means for the monetary policy outlook in the US and the key data driving forecasts. We consider some of the short and medium-term trends we're seeing in the markets, particularly gold and the forces driving the record highs, what's been impacting the US dollar and examine what has been happening in the Japanese market, both for foreign exchange and government bonds.
Concise, insightful and timely, this episode is essential listening for investors and asset allocators seeking a clear, expert take on macro-economic signals and monetary policy moves. Tune in for practical perspectives, investment views and the themes that will shape portfolios in the short and medium-term.
Disclaimer: This podcast is only for the attention of professional investors in the financial industry. Outerblue by Amundi. Welcome to Outerblue Convictions, Market Analysis and Asset Allocation Views.
Swaha Pattanaik
Hello and welcome to our monthly take on the key topics in financial markets and the global economy. I'm Swaha Pattanaik, the Head of Publishing and Digital Strategy at the Amundi Investment Institute. And it's my great pleasure to welcome Monica Defend, the head of the Amundi Investment Institute. Hello, Monica, and lovely to have you in London in-person for this recording. What a treat.
Monica Defend
Thank you, Swaha. So happy to be here with you.
Swaha Pattanaik
The weather's cheered up for you. So it's not actually the only trip you've made in the last fortnight because you were in Switzerland for Davos last week. That was quite the meeting this year. I'm going to put you on the spot and say if you had to describe how you felt at the end of that jam-packed week. One or two words.
Monica Defend
Well, I think it was brutal on the geopolitical front, but quite constructive on the markets and on the economy. The rupture thing is something that is clearly on my mind in the way we're going to address our research efforts and eventually our investment convictions.
Swaha Pattanaik
So I'm going to summarize three words so brutal, constructive, but rupture. So what are the implications? You're saying it was constructive for markets. That's quite interesting given the range of things that were coming up that could worry them, including say Greenland, which is off the table thankfully for now. What was so constructive for markets?
Monica Defend
Well, on the macro outlook I think that we are now acknowledging the fact that the policy, geopolitics, volatility are going to be the main drivers of the cycle moving forward. But with this innovation cycle that we've been mentioning when talking about our outlook. This is going to last. It is going to be structural, and it is going to help economies and markets to move faster and to a certain extent higher.
Swaha Pattanaik
So, that innovation cycle and the economic impact, we had some quite downbeat consumer confidence data out this week, but the Fed meeting has just happened and Jerome Powell didn't sound too worried overall about the economy, as you say, in line with your thinking. What are you expecting from the Fed this year, at the moment?
Monica Defend
Well, if we stay and we stick to the traditional monetary policy posture, which is something, again, as a takeaway from Davos, it is going to change. It will be more about liquidity, balance sheet operations. So the unconventional framework, that as investors we should look at, rather than the traditional cut or hike cycle. What we acknowledge is that the US economy is gaining momentum, that as Jay Powell said, the labour market is stabilizing. We need really, I think, it deserves a deep dive because the AI is going to have some consequences on the labour market. But in the short term, the US economy is getting traction. We remain of the idea of two cuts in the pipe, but inflation, productivity and labour market are the key data we will depend on.
Swaha Pattanaik
Okay. So that sounds like a really positive backdrop. And yet, at the same time, we've seen gold go to a record high that's just a whisker shy of $5,600 an ounce. It's annoying how close it got to it, but it didn't quite break. What do you think is going on here?
Monica Defend
I think that investors are positioning not for a drama, but for more discipline in the way they are constructing their portfolio, and this is by the way what we are doing as well, with diversification being the name of the game, and probably the most recurrent word that I've heard last week. So on gold, there are some structural forces related to the public sector that is diversifying on reserves because of the geopolitical risk they don't want to get trapped into sanctions, and this is creating a long-term structural demand from retail investors entering the market to diversify out of the geopolitical risk, but not only. There is this uncertainty on the diverging forces that are on the US dollar, because on one side we can talk about the US dollar getting weaker because of diversification issues. On the other side, we might assist to some re-dollarization because Stablecoins call US dollar back into play. So this is, again, why I think gold eventually is the asset class that investors are looking at.
Swaha Pattanaik
So you're talking there about some midterm trends. Let me pull you back to the short- term and ask you to drill down a little bit into the dollar. You've had a call for a while that the dollar will weaken, absolutely spot on right through 2025 and the start of this year. We got another leg down, however, when there was Donald Trump's statements about the dollar came up, and it calls into question what has been a sort of fairly laissez-faire policy towards the US currency. Sort of abiding at least with lip service paid to what was called the strong dollar policy. Do you think this policy still exists at all?
Monica Defend
I think that the US administration wants a weaker dollar, to which extent we need to put some discipline on it. And for example, out of our calculation, fair values versus the euro is 1.24. So this is our fair value in the medium term. We had Trump, but then the day after Scott Besson said, well, no, you know, maybe not that weak. I think really that there are some forces at play where there is some convenience, but up to a point to have a weaker US dollar. But volatility, as I was saying, will be entrenched. And the FX, because the movement has been brutal also on the yen. For example, the FX are clearly the asset class that responds in the fastest way to these kind of events and declarations.
Swaha Pattanaik
So you mentioned the yen. We're coming up to a Japanese election. There has been a run up in the JGB yields, Japanese government bond yields. What are you expecting coming out of the next sort of two, three weeks past the vote on JGBs.
Monica Defend
Still volatility on the long end given the plans of having a more fiscal expansionary stance the curve will likely steepen. Yesterday, Scott Benson said there was no intervention from the Fed to buy the yen, so this is important for the market functioning, so a steeper curve is what we'd expect.
Swaha Pattanaik
Thank you. It seems like we've been waiting most of my working life, and unfortunately, that's quite long now, for Japan to use fiscal stimulus to get inflation going. It seems a little unfair that when they finally get there, they're being punished. Do you think this will change and sentiment will improve a little bit towards the government's fiscal policies? Or do you think this is something that is actually the canary in the coal mine for everybody else given Japan has perhaps a very high domestic holding of its JGBs, but its debt to GDP ratio is huge.
Monica Defend
I think there are two things that we need to highlight. The first one is that repatriation has not yet come into play. And this will be definitely a game changer. Still, investors do not hedge and prefer to stay invested in treasury. But as soon as repatriation will materialize, we see the market stabilizing, getting a clear direction. And when it goes to fiscal expansion, honestly, we have been talking about innovation, this technology revolution that has to be funded. For sure, there will be private capital, but the fact that policy is backing this innovation because it's a national security matter, and Japan is clearly taking a position on that front, maybe in a smaller size, but going into that direction make me think more constructive to Japan itself and the equity market eventually.
Swaha Pattanaik
Thank you very much, Monica. So that was really a whistle-stop tour around the world, like Davos a little bit. It's been a pleasure to have you on, in live, in the London studio with us. Thank you for joining us.
Monica Defend
Thank you, Swaha.
Swaha Pattanaik
And thank you all for tuning in. Come back next time for another conversation with Monica and do check out our other podcasts on the Research Centre.
Disclaimer: This podcast is only for the attention of professional investors as defined in Directive 2014-65-EU, dated 15 May 2014, as amended from time to time on markets and financial instruments called MIFID II. Views are those of the author and not necessarily Amundi Asset Management SAS. They are subject to change and should not be relied upon as investment advice, as a security recommendation, or as an indication of trading for any Amundi products or any other security, fund units, or services. Past performance is not a guarantee or indicative of future results.
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