Dear investor,

The moderate optimism I shared with you throughout 2023 and at the start of this year has been outstripped by the buoyancy of equity markets. Judge for yourself. After a nearly 10% increase in the fourth quarter, world stock markets have recorded an equivalent rise this year. Accordingly, it is reasonable to question at this stage the potential path of all markets. While the resilience of global activity, combined with stable real interest rates, should continue to favour the performance of risky assets, we need to assess whether current valuations accurately reflect persistent uncertainty issues.

The sustainability of high global indebtedness remains a major concern. Whilst at the peak of the economic cycle, public deficits of the United States and France currently represent 6.4% and 5.5% of their GDP respectively, while their accumulated public debt amounts to more than 100% of their annual wealth creation. Given the economic-pain resistance of the west is minimal, it is essential that real interest rates, i.e. rates above inflation, are maintained as low as possible. In this respect, it is not surprising that both Jerome Powell and Christine Lagarde are signalling the approach of monetary easing, even though inflation on both sides of the Atlantic is yet far from target. However, ongoing inflationary pressures, attributable to persistently tight labour markets and rising commodity prices, make the prospect of a rate cut problematic. Either central banks will choose to postpone cuts, in which case they would weaken growth, or they anticipate an as yet uncertain fall in inflation by cutting rates prematurely, thereby jeopardising their credibility. In our view, both the fragility of European growth and forthcoming US elections weigh in favour of the second option.

The resilience of the global economy is likely to be tested in the near future. Global activity should continue to be supported by the pursuit of accommodative fiscal policies, a probable fall in interest rates and numerous measures supporting the Chinese economy. Nevertheless, the purchasing power of American and European consumers will continue to be eroded by the ongoing rise in commodity prices and the gradual depletion of savings built up during the COVID pandemic.

The geopolitical risks, far from diminishing, appear bogged down: the arrival of spring is raising fears of hostilities rekindling in Ukraine, Mr Netanyahu continues to pursue his military offensive in Gaza, and Iran persists in fuelling clusters of destabilisation in the Middle East. While an imminent easing of these tensions seems illusory, we continue to believe that the interdependence of the various parties involved will spare us from a major conflict.

With these uncertainties in mind, what is the outlook for investment markets? In the absence of a fall in interest rates, weakening growth would challenge the generous valuation of equity markets. Alternatively, if the expected rate cuts are not accompanied by a further fall in inflation, there is a risk of a rise in long-term rates and weakening long-term bond prices. Against this backdrop, we have increased our exposure to high visibility equities, including a significant allocation to key artificial intelligence players. We have significantly reduced our exposure to long-term fixed-rate bonds. In parallel, our gold exposure benefits from the continuation of lax fiscal policies, which are being less undermined by restrictive monetary policies, and the build-up of geopolitical tensions.

On this note of caution, let me extend you my warmest regards.