Transcription

• 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 edition of our monthly Amundi podcast, where we discuss what lies ahead for economies and markets. I'm Swaha Pattanaik, the Head of Publishing, and it's a great pleasure to welcome our regular guest star. Monica Defend, the head of the Amundi Investment Institute. Hello, Monica.

• Monica Defend

  Hello, Swaha. Thank you.

• Swaha Pattanaik

  We hope you've all had a great summer. I'm not sure that journalists got much of a break, or markets, given the newsflow that's been coming out of the United States. We have seen challenges to the independence of the central bank there, the Federal Reserve. Economic data that's prompted markets to reassess their view of what lies ahead for the United States. And of course, a slew of tariffs imposed by the US administration. Monica, how have the tariffs and the US economic data affected your thinking on the outlook for the American economy?

• Monica Defend

  Let me wrap my thinking with one statement. Over the summer, the waves have been calm, but the undercurrents are now turning. And what I mean with undercurrents is the tariffs you mentioned, the frictions on the labour market, the political pressure on policy institutions and the policy uncertainty that is still globally in place. With that in mind, we evolved the US outlook encapsulating the new numbers, the Q2 releases that somehow complement the Q1, in particular on the inventory side. We have a 1.6. GDP projection for the year, a soft patch for the second half, with the US economy bottoming out over the third, fourth quarter of the year. The US economy has been resilient so far, but we are seeing eventually some moderation on the labour market, which is not the labour market falling the cliff, but definitely there is a slowdown and let's see how the non-farm payrolls were reported. Why is this important? Because it's a set of figures that, as Powell addressed during Jackson Hole, will influence the way the Federal Reserve will figure out its monetary policy stance in the coming months. What is true is that the corporate earnings so far have been the major driver of the US economy. Consumption will slow down as a consequence of the cooling of the labour market and wages decrease on the back of a higher inflation that are a result of the tariffs. By the way, the tariffs eventually are higher than what we first said in the base scenario, on average 18% on the United States. But it is still in the making, I would say, all the discussion on tariffs.

• Swaha Pattanaik

  So this is a really hard job for the United States monetary policymakers because you are seeing this labour market weakness starting to filter through with the revisions to non-farm payrolls. You have inflation running and, given what you say about tariffs, still likely to run for a little while above their target. And you have a host of uncertainties on both fronts. Plus, of course, as I mentioned, you have the political attacks. Could you give me a sense of your view on the outlook for the Fed policy and also how much the political pressures are worrying the market and you?

• Monica Defend

  Well, on the monetary policy, it will be data dependent, meaning the Fed needs, and us, we need to understand how the corporate sector will manage this new set of tariffs and increase in prices with cost negotiations, supply chain adjustments and how they will pass through the higher cost because this eventually will have an impact on the labour market that is on the radar screen of the Fed. So fundamentals in our opinion would justify two cuts but we prefer to stay and confirm the three cuts because of the political pressure that is on the Fed's shoulder. Plus we have two other cuts in 2026.

• Swaha Pattanaik

  That's quite a serious statement, though, that the political pressure is feeding into your view on what a central bank will do. How is this filtering through to your view on U.S. assets? Overall, we could start perhaps with the dollar and treasuries, which are both very closely connected with the credibility and institutional framework of the US.

• Monica Defend

  You know, being an economist, passionate of monetary policy, to my mind, one of the golden rules has always been the central bank's independence be really a must in order to have a credible target setting. With this in mind, I think that what happened on the short end of the curve is really pricing what the market is thinking short-term about this independence challenge, while I'm more inclined to see the movement on the very long-term as a repricing of the debt concerns on the US economy. By the way, this is something similar happening in the other yield curve globally, whether we are talking about Japan, UK or the euro area. I think that the independence of the Federal Reserve so far has guaranteed the liquidity and the debt of the Treasury and the US dollar. So this is going to be really, really challenged, I think. On the US dollar, probably the dynamics are less related to the independence of the central bank, but more related to the noise on the labour market and the macro uncertainty. For the time being, the depreciation trend that we have been calling for a while has stalled in July because of these concerns on the labour market. But we are really ready to reset lower the target in the coming months. And then, for us, any strength in the US dollar is just a sell opportunity.

• Swaha Pattanaik

  Okay, that's great. Let me turn to equities now, which has almost been the flip side because they've managed to see the silver lining in pretty much any piece of news that's been thrown at them. And it's buying the dip seems to be the real name of the game in the market. What's your view on equities? You were speaking about corporate earnings as well before.

• Monica Defend

  Well, we maintain our risk-on posture, meaning equity and credit exposure. When it goes to corporate earnings, the reporting season has been surprising on the upside again. On the MAG7, so the tech sector is still the king, but the corporate sector is doing well, at a point that the analysts have been revising up their expectations from 9% to 11%. We confirm our target, we are a bit more cautious, we are around 6-7% if we plug in MAG7, on the idea that given the slowdown that is expected on the economic cycle, will be reflected on the revenue side. And on margins we do see some vulnerabilities that might arise on higher prices, on PPI for example denting margin formation. With that in mind, valuations are expensive, in particular when you compare them with the current inflation environment. A 3% inflation usually is consistent with a 17% price earning on the S&P 500. What we have today is the S&P 500 at 22% plus PE, while the equally weighted is a 17. So the call we are making on equities, global equities, is that really you need to go beyond the surface. Probably there are not convincing stories on geographies, much more so on a sector level, because this allows you to play on the artificial intelligence, on the climate change, on the life sciences, these long-term trends that we've been identifying. So what can happen from now to year-end is still equity market moving up but there are some vulnerabilities related to valuations and a concentration that you need to pencil in.

• Swaha Pattanaik

  Thank you Monica. So let me turn to one of the other sort of tariff issues that has come up, which was on emerging markets, where we saw India get hit with a much higher level of tariff, headline-wise, than expected. I think even on average, probably, as well. China, however, has been a little more buoyant over the summer period. Could you talk us through and do perhaps a compare-contrast of the two economies and the markets outlooks?

• Monica Defend

  Well, I think that this tariff is really going to hit emerging markets as a primary. With that in mind, on average, the tariff rate in India is higher than what we expected, but it's not the 50% that we read. If you take into consideration all the exemptions that are taking place at sector level, it's more consistent with 35%, which according to our calculations, could drag 0.6% out of GDP. In the meanwhile, we had an extremely high reading of the Q2 Indian GDP. We are still cautious on that because it looks like there has been some miscalculation on the GDP deflator. But all in all, we set the target to 7%. In the meanwhile, the Indian policy makers have been putting in place these good and service tax, so the GST, and this would help the country to temper this price war. China has been experiencing policy support both on the fiscal and on the monetary front. On average, results have been good at the point that our target for GDP growth this year is 4.8. What will happen in the coming months? We think the policymaker will pause. So no further cut from the central bank, no further fiscal stimulus. But all in all, the story of the great manufacturing hub out of China and great service hub out of India is still in place. Again, it will be a matter of diversification to be played on the global equity portfolios.

• Swaha Pattanaik

  Thank you, Monica. Well, that sounded like a lot to cover. After what was supposed to be a quiet summer period and obviously wasn't. Thank you so much, Monica, for coming straight back from holidays and covering so much ground with us.

• Monica Defend

  Thank you.

• Swaha Pattanaik

  And thank you for tuning in to this Amundi podcast. We will catch up next time with, I'm sure, lots to discuss again. In the meantime,we'll see you soon. Thank you.

• Disclaimer

  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.