Asset Allocation Outlook

We maintain our modest overweight stance on US equities. We expect continued outperformance in the region, supported by mega- and large-cap stocks, and also by an increasingly broadening earnings recovery. Lower corporate taxes, rising investment, easing rates and deregulation are creating a more favourable backdrop for a wider set of companies. Even small-cap companies’ earnings revisions have started to turn positive for the first time since mid-2022.

We maintain a modest underweight stance on European ex-UK equities. We think that optimism around Germany’s fiscal measures is justified. However, the broader market impact is likely to remain limited, with benefits concentrated in areas such as German small- and mid-cap stocks, defence and infrastructure. Overall, European equities face a challenging environment of muted growth and earnings that continue to trail other regions, reinforcing our underweight stance.

We hold a modest underweight view on UK equities, reflecting expectations of continued tech leadership — an environment where the UK typically lags. However, stronger earnings revisions and favourable valuations counteract some of the policy and structural headwinds.

We maintain a modest overweight stance on Japanese equities. Corporate governance reforms and restructuring continue to provide strong support, while record-high buybacks combined with attractive dividend yields create a compelling profile for risk assets in the region. At the macroeconomic level, persistent reflation reinforces the constructive backdrop, and renewed political stability under the new LDP-Ishin coalition government represents an additional positive development.

We retain our neutral stance on emerging markets (EM) equities. While the region has significantly outperformed its developed market (DM) counterpart this year, most of the rally (especially in China) has been driven by valuations and sentiment rather than fundamentals. While the macroeconomic backdrop for EM risk assets is supportive, our neutral view reflects caution about chasing sentiment-led gains and a lack of conviction on China.

We’ve shifted our stance on US rates from underweight to neutral. The overall backdrop for the Fed remains challenging, with persistent above-target inflation, a softening labour market yet also a pickup in real activity. We continue to closely monitor inflation dynamics and policy uncertainty surrounding the Fed’s transition, which remains a key risk factor.

We still hold an underweight view on eurozone rates, expressed via our stance on German government bonds. In our opinion, the European Central Bank (ECB) has limited room for further policy easing, following its substantial rate reductions over the past year. At the same time, the potential for stronger economic momentum driven by German fiscal initiatives reinforces our underweight stance.

We’ve closed our underweight stance on Japanese duration and moved to neutral. Inflation risks remain skewed to the upside and labour market conditions are still tight. However, with expectations for Bank of Japan rate hikes now pushed further out, we’ve extended our investment horizon and returned to a neutral stance.

We hold a neutral view on investment-grade credit. Spreads remain near historically tight levels, making it hard to justify adding risk to the asset class at this stage.

We maintain a neutral view on high-yield credit, consistent with last month. The ongoing bifurcation within the high-yield market remains a concern and, while all-in yields continue to offer attractive value, spreads are exceptionally tight. Given these dynamics, we are comfortable with our stance of remaining on the sidelines for now.

We’ve modestly increased our overweight stance on emerging market debt. The macroeconomic environment remains supportive given lower US rates, a weaker dollar and improved risk appetite. We continue to favour the asset class’s more defensive profile, with nearly half of the universe investment-grade rated. In addition, EM debt offers a differentiated source of carry, which reinforces our constructive stance.