Outerblue Convictions – Global Investment Views – Narratives of love and fear

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 this Amundi podcast. I'm Swaha Pattanaik, the Head of Publishing, and it's my great pleasure to welcome our regular guest star, Monica Defend, the Head of the Amundi Investment Institute. Hello, Monica. 

Monica Defend: Ciao, Swaha. 

Swaha Pattanaik: So, Monica, a lot has happened since we spoke last month. I feel years older, but we've had Deepseek at Chinese AI startup, figuring big moves, especially in US markets. We barely got over that before US President Donald Trump's tariff proposal caused more consternation. And then just as things were starting to calm down, we got the Munich Security Conference. US comments prompted a wholesale re-evaluation of how much Europe would need to spend on regional security and what would happen with the Ukraine war. We've seen some wobbles Monica but equities have actually gained over this time. What's going on and why is this happening? 

Monica Defend:  Indeed, it has been a very starting beginning of the year. I think that equity continues to drift higher because there are really relying on sound fundamentals. We are just probably at the end of the corporate reporting season in the United States, which shows double digit growth, 50%. And it was not only the Magnificent 7, because the index ex-Mag 7 grew like 11% plus. In Europe, we had something around 4%. So, solid fundamentals eventually have been reflected into sound markets dynamics amid the uncertainty that in particular on the geopolitical front have been coming into place. Something that I think has been changing versus the end of last year is the narrative of the market. If by the end of last year, all was about this US growth being exceptional and remaining exceptional, now investors are a little bit more worried about inflation. Definitely, it's inflation on top of investors' mind today. 

Swaha Pattanaik: Thank you, Monica. So here's the thing. Equities have been rallying, but at the same time, gold is hitting record highs. Now, this is a slightly odd fit with the risk taking on the one hand and such strong demand on the other for a metal that's a traditional safe haven. How do you explain this and what are you expecting to happen on gold and on the equity side in general? 

Monica Defend: Well, I would frame this environment as kind of love and fear. Love because of the sound fundamentals and the economic growth that is moderating, but is still sound. And on the other, all the uncertainty on tariffs, on inflation, on the medium term growth. So this is what is happening and this is why on one side you have equities moving higher and and gold that in any case remains a good portfolio diversifier plus central banks are quite active on this asset class as well. Honestly i do not expect really skyrocketing performance of gold but i would keep it in case of geopolitical risk rising, in case of inflation risk rising and again as it is a good portfolio diversifier. 

Swaha Pattanaik: Thanks, Monica. So I'm going to pick up on what you said, love and fear. That's not necessarily the recipe for a healthy relationship for the way you describe it. But you could also frame that as what's happening after the Munich Security Conference with the relations between the US and the rest of the world. I mean, the world has relied on the US as the economic and military hegemon. But there is a lot of fear at the moment about where we're going next. How did this really important conference this year affect markets and your thinking? 

Monica Defend: Well, one side, what the US administration is doing is simply continuing on the path they've been announcing. So announcing tariffs, announcing they might retreat from security. Just to bargain and negotiate what they really want, which is a weaker US dollar, probably. On the other side, I tend to see the Munich conference as a real game changer for Europe. Europe needs to increase its defense capabilities. It was already there as an issue. Probably now we just got the trigger. I believe we need to wait for the German elections to be over in order to see what's next for Europe, whether it is a short-term relaxation of fiscal rules. This is probably the most likely scenario, as Ursula von der Leyen at the conference said. We are also talking about common debt to finance defence, having in mind that this is not a COVID-like situation. It is something that is persistent and that has to be structural. Involvement of private financing, there is the need to mobilise private funds. But again, let's wait for the German election to see more clarity in what the European leaders will decide to do. All in all, this should be positive for GDP growth eventually. 

Swaha Pattanaik: Glass half full, I like it. So, listen, higher defence spending obviously implies more borrowing, you know, either national or you're talking about common debt. How much of an impact is this happening on your thinking on fixed income? Because I know you've been flagging for a while about sort of the debt levels generally being very high after the series of shocks you mentioned, COVID, before that the Eurozone crisis. It's been building up over time. So, what's feeding into your thinking about the outlook for this asset class? 

Monica Defend: Well, I would really focus on the glass half full, seeing all these, in particular for Europe leading into higher growth and moderating inflation, which implies eventually the ECB continue to cut rates while the curve to steepen. So this would reinforce a position that we have already in place. All in all, I don't see really much out of the country risk premium impact. So while we still like peripheries, probably we are almost there. Duration-wise, it remains always super difficult, in particular in the US, where we have the Fed that we expect to stay on hold until the second quarter this year, just to see how the policy administration eventually will move on all the declarations that they've been making so far. So a steeper curve probably in the US as well as in Europe. In Europe the direction is more clear. 

Swaha Pattanaik: Thanks, Monica. We talked earlier on about tariffs. Now, obviously, tariffs were put on ice for US trading partners, the closest trading partners geographically, Canada and Mexico. China, however, is a different story. Can I just ask you what your thinking is on the outlook growth and otherwise for China and the response to the tariffs so far? 

Monica Defend: Yes, when it goes to China, I think the type of game that US and China are playing is a strategic one. It's more or less a chess game. And the China response to the tariff threat has been quite smart. And what I think will happen is that in the short term, probably in March, when they will disclose the size of the fiscal package, this will help them to manage the tariff increase, but in the short term. And all in all, it will be kind of a downside management from China on the internal shock they have. Still, they will need to rebalance the economy while managing the exogenous shock that tarrifs represent. So far, we haven't changed actually our GDP projection for the year. We hold it to 4.1% GDP growth. 

Swaha Pattanaik: Okay, good to know. So there's a lot to cover, Monica. And maybe I could just pick up on one last point, which is the dollar. You mentioned right at the start about what the Trump administration may want. How do you see the dollar evolving through the course of the coming months? 

Monica Defend: At the beginning of this conversation, we said that the narrative year-to-date has changed into some inflation fears. And the US dollar has been the safe haven, and also one of those asset classes that is helping investors in diversifying. As long as we will have this uncertainty, probably the full first quarter, we might see a strong US dollar around 1.05. This is the target for this quarter. Then, when more clarity will be on the macro front, notably GDP and inflation, and if the Fed will be in a position to start cutting rates again, then we will see the US dollar depreciate. What is that, let's see. On our card we have a 1.12 versus the euro again, but let's see if the US administration would like to push it further. 

Swaha Pattanaik: Thank you, Monica. So much to cover. Thanks for going through it at pace with us. Great to have you on the podcast again. 

Monica Defend: Thank you Swaha. 

Swaha Pattanaik: And thank you for tuning in to this episode of our Convictions Series. Check out the Amundi's Research Centre or your favourite podcast platform for more of our podcasts. And we hope you'll join us again soon. 

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.