• Trump’s attacks on the Fed have effect on interest rates
• French budget troubles trigger interest rate volatility
• Investment policy unchanged

Global markets delivered solid gains in August, with the MSCI All-Country World Index rising 2.5% and the Bloomberg Global Aggregate bond index up 1.5%. Equities led the advance, supported by resilient earnings and growing expectations of imminent monetary easing by the Federal Reserve. The S&P 500 gained 2.0% despite intra-month volatility, while Japan’s TOPIX outperformed on the back of a new trade agreement with the US and stronger-than-expected economic data. China also contributed positively, with the MSCI China index advancing as authorities pledged to triple domestic chip production by 2026 and extended a trade truce with the US. Europe posted more modest returns: the MSCI Europe ex-UK rose 1.2%, but political uncertainty in France weighed on the CAC 40, as mounting fiscal strain and rising spreads over German Bunds highlighted budgetary risks. The UK lagged as inflation surprised on the upside and gilt yields surged.

Within equities, earnings developments were the key driver. The US once again stood out, with Q2 profits growing by 12.4% year-on-year and over 80% of companies beating expectations, led by tech giants such as Alphabet, Amazon, Meta, and Nvidia. Europe delivered a modest 4.0% increase, a relief after two quarters of contraction but still insufficient to break from years of stagnation. Analysts have raised forecasts for the coming 12 months, yet projected earnings growth of 11% for 2025 and 13% for 2026 may prove too optimistic given slowing global momentum. Style factors still mattered - value outperformed growth and small caps beat large caps. The broader picture is one of resilience in the US versus lingering weakness elsewhere. In Europe, meager growth expectations and fiscal tensions amplify the challenges: France remains stuck in political gridlock with a deficit above 6% of GDP, while most eurozone countries lack fiscal room to provide stimulus. Only Germany’s infrastructure and defense plans may offer some lift, but overall consumer confidence has weakened again, underlining the fragile backdrop for European equities.

The policy backdrop remained central. At Jackson Hole, Fed Chair Powell acknowledged that current interest rates may be restraining economic activity and flagged growing risks in the labor market, reinforcing expectations of a September rate cut. Markets are now pricing in around 100 basis points of easing by mid-2026, which in turn led to a notable steepening of the US yield curve: near-term yields declined as investors positioned for policy cuts, while longer maturities rose on concerns over fiscal sustainability and the Fed’s independence. Political developments amplified this unease, as efforts to dismiss senior Fed officials and reshape the Board raised the prospect of a more politicized central bank and potential erosion of its credibility.

In fixed income, US Treasuries returned 0.9% in August, supported by the Fed’s dovish shift. European sovereign bonds benefited from cautious growth prospects and still-modest inflation, though French paper lagged on fiscal stress, while UK gilts sold off sharply with 30-year yields hitting their highest since 1998. Against this backdrop, high-quality government bonds remain our preferred allocation, providing stability and income. They also look appealing if economic growth disappoints more sharply than expected, as yields would likely fall quickly, delivering significant capital gains. By contrast, spreads in investment grade and high-yield credit remain historically tight relative to macro risks, leaving little cushion should growth falter. We therefore maintain an overweight stance in sovereigns, combined with an underweight in corporate credit, consistent with a defensive allocation.

Taken together, markets have continued to rise despite the headwinds of weaker global growth and persistent inflation. We believe these challenges are not yet fully reflected in equity valuations, where risk premia have compressed to unusually low levels. While strong earnings have provided important support, and upgrades to forward expectations have underpinned the rally, the outlook for growth and margins remains demanding. At the same time, we see no evidence of broad market excess: investor sentiment is still cautious, AAII surveys point to lingering pessimism, and institutional positioning in large-cap technology remains at multi-year lows. Above all, valuations are anchored by robust earnings growth. This combination leads us to a neutral stance on equities - acknowledging resilience, but mindful of stretched valuations and insufficiently discounted macro risks. Bonds, especially quality sovereigns, offer the most attractive balance of income, resilience, and potential upside in a weaker growth scenario. Portfolios that stay diversified across regions and asset classes, while disciplined in risk-taking, are best placed to navigate this environment of slower growth, stickier inflation, and heightened political uncertainty

Please find attached our last Asset Allocation Update for September.