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The first half of the year was marked by significant market volatility, driven by political announcements related to U.S. protectionist measures and global fiscal policies. Nevertheless, markets ended the semester on a positive note, with U.S. and European equities reaching all-time highs. In this context filled with both risks and opportunities, how should investors position themselves in the markets? Find out in our video with Xavier Chapard, strategist at LBP AM.
While the peak of risk may be behind us—following early setbacks for the U.S. administration—and the global economy has proven more resilient than expected, growth is still projected to slow significantly in the second half of the year, and uncertainty remains elevated
Medium-term growth prospects are clearly improving for the European economy. Germany’s fiscal shift is historic, with the government aiming to act swiftly. Public investment is expected to increase by 2 percentage points of GDP in the coming quarters and remain elevated for years. Combined with rising European defense spending, a more accommodative ECB, and stable energy prices, this could finally lift the region out of stagnation. This outlook is promising for European risk assets.
However, short-term economic risks remain tilted to the downside due to the ongoing U.S. trade war, the lagged impact of uncertainty on business confidence, and the anticipated slowdown in the U.S. economy. Moreover, capital expenditure in Europe will take time to gain momentum.
Overall, we are optimistic about European assets heading into year-end, though we remain cautious over the summer following the strong market rally earlier in the year and the recent appreciation of the euro. Above all, agility and responsiveness will be essential in the coming weeks.
Our equity positioning is slightly defensive this summer, with a preference for emerging markets and Chinese stocks. However, we are prepared to increase our exposure to European equities in the second half of the year.
Valuations remain elevated. U.S. equity valuations are near historical highs, and European equities have also risen well above their long-term averages. That said, earnings expectations have been revised to more reasonable levels, which should support the ongoing market trend.
We remain highly selective across sectors, as political and geopolitical developments are driving significant dispersion.
Fundamentals remain supportive for corporate credit, with strong corporate balance sheets, low default rates, and continued investor demand for the asset class.
We expect this trend to persist in the coming months, supported by prospects for soft—but not negative—growth and looser monetary conditions. Credit spreads narrowed significantly in Q2 but remain at reasonable levels in our view.
Overall, credit remains our preferred asset class. However, political shifts and uncertainty could challenge certain companies and sectors, prompting us to favor high-quality issuers and remain highly selective in high yield and U.S. credit.
Government bond yields remain highly volatile, driven by fiscal announcements and inflation uncertainty, but without a clear directional trend.
On one hand, the ECB is expected to cut rates again, and inflation is likely to dip slightly below the 2% target in the second half of the year—favoring shorter maturities. On the other hand, growth is expected to rebound toward year-end, and government financing needs—particularly in Germany—are set to rise, which could put upward pressure on long-term yields.
Overall, we maintain a neutral stance on sovereign debt, focusing on short-term and peripheral European bonds, while tactically allocating to long-duration U.S. Treasuries over the summer.
Les opinions exprimées (i) sont considérées comme fiables par LBP AM et fondées ou justifiées en fonction du contexte économique, financier, boursier et réglementaire et (ii) sont fournies uniquement à titre d’information.