Asset Allocation Outlook

We’ve upgraded our view on US equities to a modest overweight. The fundamental picture is still supportive; we expect low double digit earnings growth and have seen broader participation in earnings delivery beyond the narrow leadership cohort. At the same time, the escalating conflict between the US and Iran — particularly its implications for energy and oil markets — has increased our near-term conviction on the US, partly because we view it as somewhat less vulnerable to a gas-price shock than Europe.

We’ve downgraded our view on Europe ex UK equities to a modest underweight stance. While policy support, including German fiscal spending, may provide a tailwind, we think the benefits are likely to be uneven, with upside concentrated in more domestically orientated pockets. Moreover, the escalating conflict in the Middle East is once again underscoring how Europe remains highly exposed to a possible gas price shock. A renewed spike in gas/LNG prices risks tightening the supply side and lifting stagflationary pressures that will likely affect Europe more than the US.

We maintain our modest underweight stance on UK equities. In addition to sharing the same vulnerability to a gas-price shock with the rest of Europe, the UK remains constrained by lower earnings growth and a more defensive market profile relative to other regions, particularly emerging markets (EM). As a result, we continue to view the UK as an appropriate funding source for our modest overweight stance on EM equities.

We remain neutral on Japanese equities. We continue to see supportive domestic policy dynamics, which could be constructive for risk assets and earnings momentum in the region. At the same time, we are mindful that policy normalisation and yen moves can generate volatility. Hence, our neutral stance reflects a more balanced near term setup: supportive domestic policy dynamics offset by the potential for yen and rates volatility to create episodic headwinds.

While mindful of the potential adverse impact of the events in the Middle East, we remain comfortable with our overweight stance on EM equities given a still broadly constructive global backdrop and a weaker US dollar. AI related investments sustaining the semiconductor upswing and underpinning earnings momentum in Korea and Taiwan are the other key factor supporting our current stance. The AI infrastructure buildout remains an important driver of the regional tech cycle, turning us most constructive on Taiwan and Korea — despite both being large energy importers and thus more fundamentally exposed to increased volatility post the US-Iran escalation.

We are neutral in our view on US rates. With no clear directional catalyst, we expect yields to trade in a broad range through 2026, which reduces the scope for high-conviction tactical views. The macroeconomic backdrop has been resilient, and we expect inflation to continue moderating, but wages and tariffs — and, if sustained, rising energy prices — pose key inflationary risks, which we are watching closely, as they could affect the Federal Reserve’s rate path.

We remain neutral on European rates. The anticipated fiscal impulse, particularly in Germany, is expected to support growth into 2026 and is now largely reflected in valuations. While we do not have an active regional view at present, we continue to monitor France as a potential area that could prompt us to revisit our stance, mindful that higher energy prices are a key risk to monitor.

We remain neutral on Japanese rates. Markets are pricing a steady normalisation path from the Bank of Japan in response to firmer inflation and stronger nominal growth. We are therefore maintaining a neutral view while watching for clearer opportunities to revisit our stance.

We retain our neutral stance on investment grade credit. With spreads at such tight levels, we see limited compensation for volatility and little scope for further compression.

We remain neutral on high yield. Spreads are compressed, which tempers our view on the risk reward trade-off, despite appealing all in yields, and reinforces our preference for remaining on the sidelines at this stage.

We maintain a neutral view on EM debt at the time of writing. Fundamentals remain comparatively constructive and it represents our preferred segment within credit, but we are waiting for a more attractive entry point before engaging.