There is a divergence happening between the US – showing signs of deceleration – and Europe, which is gaining strength, in part because of major geopolitical shifts. That is the view of this author who ponders the investment implications.

The following article concentrates on what the author says is the growing economic divergence between Europe and the US. It highlights Europe's improving economic outlook, particularly in manufacturing and bonds, while it says the US is facing slowing growth, weakened consumer sentiment, and trade tensions. European equities and are gold emerging as attractive investment opportunities.

The writer is Philipp Bärtschi, chief investment officer at J Safra Sarasin Sustainable Asset Management. The editors of this news service are pleased to share these views; the usual editorial disclaimers apply to the opinions of guest writers. Please remember that these articles are designed to start conversations, so please respond and send comments if you wish to do so. Email tom.burroughes@wealthbriefing.com and amanda.cheesley@clearviewpublishing.com

Europe surprises on the upside 
US economic indicators have weakened somewhat in recent weeks, albeit from a high level. The ISM Purchasing Managers' Index for the services sector stabilised in February, while the one for the manufacturing sector weakened. The data also shows a significant decline in new orders in the manufacturing sector and a slightly weaker labour market. With the start of President Donald Trump's trade war, there is an increasing risk that the upturn in the manufacturing sector has already reached its zenith. Consumers are worried about rising inflation and the latest surveys show a significant deterioration in consumer sentiment. If the negative surprises continue in the coming weeks, fears of a more pronounced slowdown in growth are likely to spread soon. 

Although economic activity in the eurozone remains subdued, the latest figures look encouraging. The latest purchasing managers' data point to a moderate revival in economic momentum. Investor sentiment and consumer confidence have also improved. In view of the results of the German elections on 23 February, a coalition between the conservative CDU/CSU and the Social Democrats seems likely. This should improve the business climate somewhat, as defence spending is expected to rise sharply, which should boost momentum in the manufacturing sector.

With the tense situation between the US and Europe regarding the war in Ukraine, the pressure on Germany to increase fiscal spending earlier and more strongly is likely to increase. It seems quite possible that the crisis for Europe will ultimately become a positive stimulus for growth.

Together with the release of the Chinese AI engine DeepSeek, the latest news from China was quite encouraging. Credit growth has accelerated again, and home sales are stabilising. Tourism revenues generated around Chinese New Year grew solidly. However, the further recovery of economic activity will depend on fiscal support and continued structural reforms.

European bonds preferred
The latest US macro data have eased fears of a renewed acceleration in economic activity, which would necessitate higher key interest rates. The markets are gradually regaining confidence that the US Federal Reserve could soon resume its interest rate cuts. However, in view of the stubborn inflation and the announced trade tariffs, the hurdle for a rate cut seems quite high.

Growth would therefore have to weaken very significantly to move the US Fed off the sidelines. With a two-year interest rate of less than 4 per cent and only slightly higher interest rates in the five to 10-year range, the potential for lower interest rates is limited. 

In Europe, on the other hand, further interest rate cuts are likely. This should support bonds in the coming months, even if they face headwinds from the expected higher fiscal spending. In Germany, in particular, the debt ratio is relatively low and higher deficits appear quite manageable.

Overall, we continue to assume that the steepness of global yield curves will increase and prefer bonds with medium maturities, as they have sufficient yield to maturity to cushion unfavourable interest rate developments. We are maintaining our neutral view on corporate bonds and our slight preference for high-yield bonds over investment grade.

European equities offer more potential
After the equity rally following the US election, in which markets expressed their positive expectations of pro-growth policies, equity markets have recently started to reassess the impact of US tariffs on inflation and corporate profit margins. US equities appear to be particularly vulnerable given the prospect of an extended Fed rate pause. The market's reaction to the good earnings figures for the fourth quarter was muted. In addition, some cracks appeared in the quarterly reports of the Magnificent 7, which were exacerbated by China providing insight into its AI ambitions. 

We favour European over US equities. These should benefit from the peace talks in Ukraine. Rising fiscal spending in Europe would have a positive impact on earnings expectations. We favour defensive over cyclical equities and value overgrowth, which is reflected in our regional preference for Swiss equities as they are relatively insensitive to tariff risks and tend to benefit from a strong US dollar.

Rising geopolitical risks should have a positive impact on the gold price 
The start of the trade war by US President Trump and the generally high valuations of US equities prompted us to take profits at the beginning of February and reduce our equity weighting to a neutral one. Volatility in the financial markets and geopolitical tensions have increased since then, meaning that our neutral positioning remains appropriate. We are underweighted in bonds and overweighted in cash and alternative investments.

Our base scenario of moderate growth and further interest rate cuts has not changed, but the downside risks have increased. To protect our portfolios against systemic risks, we have decided to build up gold positions where possible in the near future. In the short term, gold could be somewhat overbought, and sentiment seems overly optimistic, but in the longer term, strong demand from central banks and private investors should lead to higher prices. 

In addition to gold, we continue to hold catastrophe bonds in our portfolios, which have good diversification properties. To protect ourselves against inflation risks, we are holding on to our commodity investments.