The Return of Diversification (copy 1)

October ended in a more mixed market environment, marked by a pronounced rotation within equity markets and a notable easing in sovereign bond yields. Global equities proved broadly resilient, with the MSCI World posting a modest gain of +0.91% in euro terms, supported by favourable currency effects by month-end. Yet beneath this apparent stability, substantial movements occurred across regions, sectors and investment styles. Several AI-related technology stocks experienced sharp corrections, although European investors were partly shielded by the euro's 1% depreciation against the US dollar. guidancDespite significant sector rotation, the US market declined by only 0.8% in US dollar terms, translating into a gain of 0.90% in euros, whereas technology-heavy indices suffered much more pronounced losses. Emerging markets were also heavily affected, with the MSCI Emerging Markets Index falling by around 8%*, mainly due to weakness in Asian technology-exposed markets such as South Korea and Taiwan.

Indeed, more than the direction of the indices themselves, it was the internal market rotation that dominated October's headlines. Value stocks outperformed Growth stocks, highlighting a clear broadening of market performance beyond the largest technology companies. Overall, the decline in AI-related stocks reflects growing concerns over the profitability of the substantial investments being made in infrastructure, data centres and semiconductors.

In bond markets, developments moved in the opposite direction to those seen at the end of September. Having reached 5.29%, the yield on the US 10-year Treasury bond declined to around 4.93% by the end of October (-35 basis points). In Germany, the 10-year Bund yield fell from 3.59% to 3.32%. Sovereign bonds benefited from increased demand as equity market volatility rose and investors sought higher-quality assets. France remained the notable exception. Concerns surrounding the country's fiscal trajectory and political situation continued to weigh on French government debt, pushing the yield spread between French and German 10-year bonds to approximately 166 basis points. European financial stocks were also affected by contagion and declined by more than 5%.

On the central bank front, the US Federal Reserve (Fed) kept its target interest rate range unchanged at 3.75%-4.00% following its meeting on 28 October. This decision was not universally supported, given that inflation remains above target. Similarly, the European Central Bank (ECB) left its deposit rate unchanged at 2.50% following its meeting on 29 October. The ECB also emphasised that higher energy prices represent both an upside risk to inflation and a downside risk to growth. As a result, the ECB continues to adopt a data-dependent approach without providing forward guidance on the future path of interest rates.

From a macroeconomic perspective, the US economy remains particularly robust, with investment and consumer spending providing strong support for activity. Estimated annualised GDP growth reached 3.4%, compared with 2.2% in the previous quarter. The main concern remains inflation, which continues to run at elevated levels. September consumer prices increased by 3.7% year-on-year, while core inflation stood at 2.6%.

Within the euro area, estimated annualised GDP growth of 1.3% suggests greater resilience than expected. However, it should be noted that this figure is significantly distorted by exceptionally strong growth in Ireland. Inflation continued to accelerate, rising from 3.2% in August to 3.8% in September, mainly driven by higher energy prices.

Finally, oil remains a key focus for financial markets. Ongoing tensions in the Middle East pushed Brent crude prices close to USD 118 per barrel by the end of October. Persistently elevated energy prices continue to complicate the task of central banks by sustaining inflationary pressures, although their full impact on economic activity remains difficult to assess.

Against this backdrop, portfolio positioning remains favourable towards risk assets while maintaining a more selective approach. Equities continue to be preferred over bonds. The recent correction in certain technology stocks does not undermine the long-term structural theme of artificial intelligence, but it reinforces the need to favour companies capable of demonstrating adequate returns on their investments. Exposure to Industrials and Technology is therefore maintained, as is a preference for European and US banks, despite increased volatility among European financial stocks. From a geographical perspective, positioning remains broadly neutral, with an overweight allocation to the United States. The strength of the US economy and earnings growth remains supportive, although current valuation levels call for greater selectivity. Positions in Biotechnology and small and mid-cap equities remain more constrained.

Within the fixed income allocation, credit remains the preferred asset class. The recent decline in yields has also improved the attractiveness of sovereign bonds, although the carry offered by credit continues to be appealing. Caution is still warranted regarding long maturities, given that inflation remains above central bank targets and public sector financing needs remain elevated.

^{*Performance figures are calculated in euros.}