Transcription

• Disclaimer

  This podcast is only for the attention of professional investors in the financial industry. Outerblue by Amundi. Welcome to Outerblue Talks Research, knowledge sharing on financial research.

• Swaha Pattanaik

  Hello, and welcome to this Amundi podcast. I'm Swaha Pattanaik, the head of publishing, and it's my pleasure to welcome Monica Defend, the head of the Amundi Investment Institute. Hello, Monica.

• Monica Defend

  Hello, Swaha.

• Swaha Pattanaik

  So, Monica, normally we speak for the Convictions series, and we're very lucky to have you here for a special research podcast, given all of the turmoil that we're seeing in the markets. We've been on a bit of a roller coaster ride in the last month, starting off with this optimism that Europe's going to use a sort of fiscal bazooka to get defense spending ramped up. And this will. absolutely have some substantial structural investment implications. But we've also got caught up in the US tariff situation, which has sent markets into a bit of a nosedive. Could I start off by asking you, how do you think the global economy and global trade is being rewired as a result of Donald Trump's approach to tariffs and trade in general?

• Monica Defend

  Thank you, Swaha. Well, I think that we are really witnessing a brutal disruption of the free trade model with an extreme reaction, as you were mentioning, on the markets, including those asset classes such as the US dollar that continue to depreciate, flagging perhaps some concerns on the US administration, the solidity of the economy and the rule of law. So to see how this is going to be rewarded, let me disentangle the short term, from the medium term consequences. So in the short term, everybody will suffer. This detoxing adjustment, how Trump is referring to it, will bite. Will bite out economic growth. And again, it's very difficult to pencil out some some of the results, but initially on a static approach, so implying no retaliation is imposed, we might lose 0.3% out of EU GDP, 0.4% out of Indian GDP, up to 1% out of the US. So the ideas stay always the same, that the country that is imposing tariffs is the one that is going to be the one that eventually is going to pay the highest toll, but also corporate profits are going to be bite out. So any asset that is connected will be eventually cheaper. By how much? Well we'll see how the retaliation and the responses from the various countries will materialize, but in the minute term I'm truly convinced that the countries will continue to rewire the trading system and they will find their way around the US protectionism at current levels. So the tariffs are really off chart. The last time we saw them was in the 1930s. So it's not really good memories what we have out there. But today the market, the economy is bigger, is much more connected. So really I see the potential for at least rerouting the supply chain, as it has been the case with the COVID and even before with Trump. Since 2016, Europe has closed eight new trade deals, China nine deals. Think about initiatives like the Silk Belt Road. So today China is looking at the continental, in Eastern Europe for manufacturing hubs. So there is this sense of looking for something and rebalancing the power. Does it mean that the US will wipe out? No, for sure they will remain at the centre of the global financial system. They will be a source of military power & equipment. There is no alternative in Japan and Europe to Google, Meta and Microsoft. But what Germany has been able to do in such a short time span with a government that was about to exit. It's huge. It's a matter of timing because the infrastructure plan will be deployed over 12 years as they said with these 500 billion. So probably there will be the short-term pain, but for a broader long-term gain, I hope.

• Swaha Pattanaik

  Thank you. So let me address that short-term pain. And some of that pain is coming through the markets as much as, you know, we're seeing the potential for damage to, well, we're seeing damage to confidence, for the potential for damage to economy. People were counting on a Trump put at the beginning when the tariff talks were coming in. That hasn't materialized so far, as far as anybody can tell. Can we still count on a Fed put given the short-term push-pull factors you were talking about? There is an impact on growth, but there is also the inflation push that's coming through. How do things look on either side of the Atlantic for the central bank policy?

• Monica Defend

  Well, I think that staying in power shoes is not really easy nowadays. So, as you were mentioning, the market has been very volatile in pricing in the Fed cuts. Yesterday, we were up to five, today it's four, extremely volatile. Basically what the market is pricing in is recession or near to the recession in the US. Growth matters more than inflation because inflation expectations are anchored and will stay anchored. Honestly, how we see things is a bit different here at Amundi because we see the risk of recession materializing, being really tangible and plausible. Just because tariffs are going to lift import prices higher and eventually this is a fiscal tightening on the US consumer and it will also imply a deceleration on investment. And second, global trade will slow down, but this will have a marginal impact on the US. However, inflation, that if you recall since we published the outlook is one of the things that matters, that worries us. The increase we see in inflation or in inflation proving to be stickier doesn't guarantee a dovish Fed. So all in all I think, first you need to focus more on the conditions, than on the number of cuts and second I think the three cuts for the time being is still an appropriate call we are making.

• Swaha Pattanaik

  Thank you, Monica. And things are looking a little bit easier perhaps for the central bank, Madame Lagarde's shoes, very elegant, probably higher than Dr Powell's, but they are looking in a slightly more comfortable position, perhaps. What are your views here?

• Monica Defend

  Well, first, I think it is important to remember that the European Central Bank will focus on the average inflation in Europe, which implies that probably we'll see higher inflation in Germany. But again, the ECB focus will be on the full region. With the euro getting stronger, as Madame Lagarde has said at the Central Bank Watcher meeting, this offering has some kind of help in facing inflation. So all in all, I think the ECB is better positioned, probably with less political pressure, and they will continue to cut. We have three in our radar and in probably to 175 or still 2% as the market is continuing to go. But 175 for us is the appropriate lending rate.

• Swaha Pattanaik

  Thank you, Monica. You evoked this picture of an economic rewiring, a diversification of export markets before. Let me turn to actual investments portfolios. There is a time of such high uncertainty, flux, volatility, wild swings, all of it. How can investors go about increasing a portfolio's resilience in this environment? And, you know, any good hedges perhaps?

• Monica Defend

  Yeah, so obviously it depends on the portfolio, how we're talking about. Let's take a balanced portfolio as a reference. Well, the idea that we've been pushing for a while was to downgrade the risk exposure at the point that I would say that today we are really neutrally risk exposed and we do prefer, and this is being a long-term call, relative positioning on the more structural themes like Europe versus the US might be the case, both on the equity, fixed income, and at this point, also FX standpoint. Because we are contained in terms of the risk exposure, you don't need much hedges, but still nice to have exposure through the realities just to pick up the potential legs up of the markets. But having asset classes such as gold, we've been revising upwards the target, but this is something that usually works well, as well as currencies. So the yen, which has been a long-term call on our side still, this is the anti-recession medicine you can have in the portfolio. So this is how we're navigating at the time the markets more long-term. Probably the diversification into private assets or emerging markets in particular on those countries that might prove to be more resilient and insulated from the tariffs might be worth it.

• Swaha Pattanaik

  Thank you, Monica. We have gone over a lot of ground. So perhaps I could ask you just to sum up a couple of the key messages our listeners should be keeping in mind as they deal with the current market turmoil.

• Monica Defend

  Yeah, sure. So keep your seatbelt fastened, as we usually suggest to our clients. Don't panic. So it's not time to sell position. The market is just too volatile. Look. on the intraday movement, it's really crazy. It's a roller coaster, as you were mentioning. Don't stay out of equities. We do expect further legs down in case earnings will be repriced down, starting from the analyst expectations, but material. There is a risk that is pending on margins, producer price index is moving higher, depreciation of the US traded dollar, some tensions on the credit spread. But I would hold the position at this stage and then consider gold and hedges in place just to shield and navigate the current turmoil.

• Swaha Pattanaik

  Thank you for those very calming words, Monica. We'll take them to heart. Thank you for joining us.

• Monica Defend

  Thank you, Swaha. Thank you everyone listening to us today.

• Swaha Pattanaik

  And indeed, let me join Monica in thanking you for joining us for this podcast. We have a whole series of other podcasts with Monica, which are called the Convictions Series, and we have other research podcasts if you would like to look them up on our research centre or on your favourite podcast platform. Thank you and we hope to have you with 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