The French asset manager Natixis is strongly in favor of US equities in its asset allocation. Despite the war in Iran and trade tariffs, the outlook for the US economy is actually quite positive, argues chief strategist Mabrouk Chetouane.
“Maybe I expressed myself a bit too optimistically about the US economy,” said the fast-talking strategist with a laugh, reflecting after a press briefing in Brussels. “But the economic data simply paint a much more positive picture than the stream of negative news would suggest.”
Visibility
First, according to the strategist, financial markets are indirectly signaling that they believe the worst of the conflict between the US and Israel with Iran is over.
“The markets are not interested in exactly when the conflict will end. It could be in four weeks, but just as easily in four years. Donald Trump says all kinds of things about it, and in reality, no one in the market is still listening to the US president the way they did at the beginning of the conflict. What markets really want to know is when the conflict reaches its peak, with maximum intensity. And in recent weeks, there have been several indications that this peak has been reached and is now behind us. That is important, because it restores visibility for the markets.”
Now that investors can gradually start making forecasts again with some confidence for the next six to twelve months, it becomes more or less business as usual again, the Natixis economist believes. “Once again, the markets are showing their cynical side: it is not the end of the war that matters, but having visibility.”
What stagflation?
The French strategist also considers the many warnings about stagflation—the combination of very high inflation and economic contraction—to be exaggerated, especially when it comes to the United States.
“Federal Reserve Chair Jerome Powell recently explained that we are not in stagflation at all at the moment. Those using the term have forgotten what the stagflation years of the 1970s and 1980s actually looked like: double-digit inflation and double-digit unemployment. Yes, there will be inflationary pressure, but it will be nothing like back then.”
The impact of trade tariffs on US prices will likely be smaller than many predicted a year ago. “Do not forget that the US is a relatively closed economy: about three-quarters of domestic demand is met internally. Import tariffs therefore affect at most a quarter of a representative basket.”
“But it is even much less,” the Natixis strategist continued. “Tariffs only apply to goods (not services), and that is just 20 percent of that quarter. According to customs statistics, the levies average just over 10 percent, not the 20 percent Trump initially threatened. So what is their ultimate impact on US inflation? 0.25 × 0.2 × 0.1. Almost nothing.”
Robust cycle
Chetouane also does not expect a recession in the US. “In the current earnings season, we see that profits of US companies are holding up well. As so often, US economic growth seems to surprise on the upside. Strong bank results, for example, point to a robust cycle.”
“There is no reason to be alarmist about the US economy”
“As for the issues around private credit, our assessment is that they are not comparable at all to the financial crisis of 2008, as some pessimists claim. The scale is much more limited. When I hear a peer from a major bank use the term ‘credit crisis’ 50 times in a presentation, I start to question that. If there were really a major problem, we would have seen it in credit spreads, and there is nothing to indicate that.”
“Large US technology companies also continue to perform strongly. Nvidia’s price-to-earnings ratio is fairly accessible. In short, there is no reason to be alarmist about the US.”
Another argument for investing in US assets, according to Chetouane, is that the US central bank still signals room for several rate cuts. “So monetary policy can still support the US economy if necessary.”
He also dismissed analyses that question the dominance of the dollar as the world’s reserve currency. “Look at the data on capital flows. There is no sign of de-dollarization whatsoever.”
US colleague
The risk-on approach to US equities is partly driven by analyses from his Natixis colleague in the US, Chetouane explained.
“What is nice about being a strategic economist in the United States is that you only have to follow one region: the United States. The rest of the world does not matter. They simply do not care. And in fact, they are right. Our economic team there analyzes the US business cycle in the smallest detail, and they remain surprised by the enormous amount of pessimism coming from elsewhere in the world.”