Gold exhibits highly positive fundamentals, driven largely by robust central bank demand. Since 2010, annual demand for the precious metal averaged 700 tons, but it has accelerated sharply since Russian reserves were frozen in 2022, now exceeding 1,700 tons per year. This reflects central banks' efforts to diversify their reserves away from the dollar. Simultaneously, the decline in US interest rates and the weakness of the dollar, two historical supports for gold, are adding further momentum. However, we recognize that market sentiment could eventually become excessively optimistic, potentially signalling the peak of the current trend. Therefore, we are carefully monitoring gold ETF holdings. For now, despite a recent rebound, we are still far from concerning levels.
After a few months of lateral movement, disinflation is picking up momentum again in most industrialized countries. Broadly speaking, consumer prices are now within central banks' comfort zone. In other words, the time has come to ease monetary policies in industrialized nations to prevent an unexpected decline in both inflation and economic activity.
Fortunately, many countries have significant leeway to lower interest rates, offering a cautiously optimistic outlook. The expected outcome of this monetary easing is a resurgence corporate investment and a revival of private consumption. While European and American central banks have taken the lead, Chinese authorities have recently followed suit by rolling out a comprehensive set of monetary and fiscal measures. These initiatives could finally curb the persistent downturn in real estate and construction, sectors that have been weighing on both consumer and business confidence in China.
Meanwhile, the geopolitical landscape has not improved, in fact, it remains the primary risk factor jeopardizing the smooth landing of the global economy and the emergence of a new cycle. However, in the absence of an exogenous shock that might cause a spike in oil prices, we foresee a context of economic resilience and monetary easing, typically signalling strong performance for financial markets. While bond markets are likely to benefit from this environment for some time, the best opportunities lie in riskier assets, particularly equities. Historically, periods of falling interest rates have been highly favourable for stock markets, especially when the economy manages to avoid a recession.
Recently, we increased our equity allocation within portfolios, favouring a return to the North American market, where its pro-cyclical nature gives it an edge over more defensive markets such as Switzerland. On the currency front, we are witnessing a deterioration in the US dollar’s fundamentals, driven by the gradual erosion of its yield premium. Following a first reduction this summer, we may soon consider further trimming the dollar's allocation in portfolios if its downward trend continues.
This is the staggering fiscal effort France must undertake to reduce its deficit to 5% by 2025. The budget outlines a combination of spending cuts and tax increases, particularly targeting businesses. This adjustment program represents bad news for economic growth.