Crédit Mutuel Asset Management: March – Asset Allocation Convictions

François Rimeu, Senior Strategist, Credit Mutuel Asset Management

Crédit Mutuel Asset Management is an asset management company of Groupe La Française, the holding company of the asset management business line of Credit Mutuel Alliance Fédérale.

The uncertainty surrounding the impact of U.S. elections has been partially lifted over the past three months but remains a central focus for investors. Currently, investors are rather optimistic, expecting that tariffs will ultimately be mere negotiating tools for the United States as opposed to long-term entry barriers. However, it may be challenging for the Trump administration to balance its fiscal policy without additional revenue, given the estimated $3.5 trillion cost over 10 years of the tax cuts proposed by the government (Source: PIIE). Therefore, today’s positive outlook could be undermined in the coming months due to the opposing nature of the various objectives of U.S. policy.

Another notable development this year is the outperformance of European and Chinese equities compared to U.S. equities. The emergence of Deepsick, Qwen 2.5 and Mistral has indeed raised doubts about the overwhelming dominance of American technology, despite another solid earnings season in the U.S. However, the margin for error in the results of certain companies seems very narrow given current valuations, which leads us to reallocate some of our investments to sectors that are lagging such as industrials. In the medium term, the broader theme of AI is not under question.

Macro trends remain largely the same, with the U.S. on one side and the rest of the developed world on the other. However, we are witnessing a rebalancing of growth from the services sector to the consumer goods sector after two years of stagnation for the latter, which should support the sector rotation we just mentioned and could even give a boost to small and mid-caps. It should also be noted that, unlike in 2023 or 2024, expectations for U.S. growth are now much higher, making it more difficult to surprise on the upside again.

The Eurozone, on the other hand, is still hampered by the very low growth of its two main economies, France and Germany, but the trend could reverse: First, because leading indicators show a slight rebound, especially in Germany, which could continue thanks to the delayed effects of the euro's depreciation. Second, because the political instability of the past nine months could partially dissipate following the results of the German elections, which are in line with expectations. Additionally, growth should be supported by budget deficits that we do not expect to decrease and that seem necessary in a world where historical geopolitical balances are being challenged. Military spending, for example, will very likely have to increase.

With contained wage growth prospects and therefore a European Central Bank that could continue its rate-cutting cycle, at least down to 2%, we maintain our positive outlook on Euro-denominated bonds, both Investment Grade and High Yield. On the U.S. side, “spread assets” seem less attractive due to extremely tight risk premiums. Finally, despite a much higher inflation risk, we expect a decline in U.S. rates by the end of the year: a 4% terminal rate seems optimistic, growth forecasts are already high and the rebalancing of the economy from services to goods may not favor the U.S. economy. Overall, this gives us a slightly more cautious asset allocation than at the end of 2024.