New Normal or New Bubble?

Highlights:

• Hard landing fears are gone. Rising confidence about future economic prospects are helping global risk assets to charge ahead, even as rate cut expectations are being scaled back.
• Global markets may be frothy, but do not look exuberant. While both concepts are hazardous, the current market pricing may reflect a ‘new normal’ rather than a financial ‘bubble’. Elevated public debt, permanent Central Bank puts, the reality of a considerable inflation shock (since 2022), and a larger debasement risk may support inflation as-sets, and lower risk premia vs. so-called ‘risk-free’ assets. 
• Still, the collapse of risk premia across markets contrasts with persistent policy and geopolitical risks. A Trump 2.0 scenario may challenge both the policy rate cut consensus, and the geopolitical order. 
• The pricing for near perfection, in this uncertain context, leaves our positions in stocks and High Yield as neutral. We keep a selective preference for cyclicals, small cap, and EM equity markets. We find risk asset volatility too low and recom-mend using it to either surf the bullish wave optionally or protect against unexpected shocks. We seize the back-up in yields to go moderately long duration and retain a large overweight in IG credit – the new ‘haven’.
   

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