Prysmian: Uncertainty in trade policies may weigh on economic prospects, upgrading European stock allocation to an overweight level

According to the Zhitong Finance APP, Thomas Poullaouec, Head of Multi-Asset Solutions for Asia Pacific at Prudential, and his team have released a latest report indicating that, in the context of ongoing uncertainty in trade policies, both consumer and business confidence indicators (also known as "soft data") have significantly weakened. However, there has been a major shift in European policies recently, including Germany increasing defense and infrastructure spending, as well as leaders from various countries in the region working together to enhance competitiveness. Although the outlook for tariffs remains unclear, the market's perception of Europe has rapidly improved, and capital has begun to flow in. Prudential believes this is not a temporary phenomenon and has raised its allocation to European stocks to an overweight level to capture the upside potential brought by increased capital expenditure and improved credit conditions.

While market sentiment typically lags behind "hard data" such as employment and spending, the current soft data reflects a more pessimistic economic outlook than the actual data. More concerning is that if businesses and consumers face high uncertainty for an extended period, it will inevitably affect their investment, consumption, and hiring decisions. Given that trade disputes during Trump's first term lasted nearly a year and a half, market sentiment may have already reflected a trend of potential economic slowdown.

Market perception of Europe rapidly improves, raising European stocks to overweight level

The strong performance of European stocks this year has surprised most investors. At the beginning of the year, Europe faced unfavorable factors such as a bleak economic outlook, the ongoing Russia-Ukraine conflict, political divisions, and the potential for increased tariffs from the U.S. Over the past few decades, Europe has experienced political turmoil, debt crises, and Brexit, leading investors to adopt a cautious attitude towards the European market.

Downgrade stock allocation to neutral, favor value stocks

In light of the ongoing uncertainty in trade prospects, Prudential has downgraded its stock allocation level from overweight to neutral. In terms of regional allocation, compared to U.S. stocks, other regional markets present more investment opportunities, such as Europe, China, and Asia (excluding Japan). These regions benefit from increased fiscal spending and a dovish stance from central banks, with market sentiment gradually improving.

In terms of investment style, Prudential favors value stocks. As funds continue to flow from high-valuation U.S. large-cap growth stocks to other sectors, value stocks are expected to benefit.

Maintain underweight in bonds, overweight in global high-yield bonds and Asian bonds

In the bond market, an underweight position is maintained. Due to mixed economic growth and inflation data, coupled with unclear policy prospects, interest rates are expected to remain volatile. An overweight position is maintained in global high-yield bonds and Asian bonds due to their attractive total return rates. Although the fundamentals remain relatively stable, spreads may come under pressure due to trade uncertainties.

Additionally, a high allocation to cash is maintained, as it offers attractive returns and provides liquidity. In times of market volatility, cash can help investors seize potential opportunities