Dear investors,

The measured optimism I have been expressing since the start of 2023 has still not been thwarted by stock markets. Thus, their modest uptick over the last quarter has contributed to a global equities rise slightly over 17% this year. Do risky assets still offer attractive upside potential at current valuations? The evolution of the main uncertainty poles strengthens our long-term convictions. In our view, they should continue to prove vindicated.

Interest rates have started their descent. It is perfectly reasonable to be concerned about the sustainability of high global indebtedness. However, as I have repeatedly stressed, the minimal resistance to economic pain of the west implies it is unconceivable that real interest rates (i.e. rates above inflation) remain elevated. Thereby, it comes as no surprise that Jerome Powell and Christine Lagarde are lowering interest rates and signalling that they will continue to do so, even though inflation rates on both sides of the Atlantic have yet to reach their targets. This stand from central banks is not only boosting asset values, but also supporting economic activity. Monetary stimulus is all the more necessary given the limited room for manoeuvre on the fiscal front following the excesses of the "whatever-it-takes" period. A number of European countries - including France - are even obliged to reduce their public deficits.

Europe's stall. The results of the latest European elections crudely highlighted the weakening of the Union governance, propelled by the derailment of the Franco-German juggernaut. In my previous letter, I shared my hope that Mario Draghi - whose intellectual authority and negotiating skills are irrefutable - would be appointed President of the European Commission. Though the press has reported his eurozone construction recovery plan, the reappointment of Ursula von der Leyen is a disappointment, even if she has shown daring in appointing commissioners less inclined to pursue all-out regulation. Our competitiveness must be boosted through lowering labour costs and an industrial policy targeting a reduction in the ever-widening lag in the development of disruptive technologies, such as artificial intelligence and biotechnology.

US elections and geopolitics. I will not hypothesise over who the next American president will be as the election promises to be tight and is still subject to a number of uncertainties. Yet we should bear in mind that the profitability of US companies would be impacted by fiscal divergences between the presented programmes. Analysts agree on a 5% boost to profit estimates under a new Trump administration, compared with a reduction of around 5% under K. Harris. However, the likelihood of either candidate being in position to carry through major reforms is minute, given the limited prospect of either Democrats or Republicans gaining a majority in both the Senate and the House of Representatives. The geopolitical impact, however, could be more significant. The isolationism advocated by D. Trump would undermine support for Ukraine and strengthen the trade war with China, while unconditional support for Israel would heighten tensions in the Middle East and the oil market. Europe's vulnerability under these scenarios is obvious. Nevertheless, I continue to believe that the interdependence of the various parties involved should spare us a major conflict.

How about markets’ outlook? While the fall in interest rates is undeniably supportive, valuation levels and clusters of uncertainty require a highly discriminatory investment portfolio. Indeed, central bank rate cuts will not necessarily be reflected in long-term interest rates until inflationary pressures are more decisively resolved, nor will they be sufficient to offset disappointments on companies sensitive to weakening global demand. We therefore continue to favour high-visibility equities, with a significant allocation to key artificial intelligence players, and steer clear of long fixed-rate bonds. Finally, our exposure to gold is supported by accommodative monetary policies and the accumulation of geopolitical risks.

On this cautionary note, I wish to extend you my warmest regards.