Facing a new economic reality

The events of this year have reinforced our view that a new global regime is upon us — one that will be somewhat messier than recent experience, with greater volatility, diverging cycles, and interventionist governments. However, it may be more attractive from an investment perspective. 

So, what does this mean for different asset classes? And how should investors position their portfolios in this shifting economic environment? We’ll dive into the specifics, but the broad response is: keep an open mind and be ready to pivot.

Fixed income

There was no shortage of exogenous shocks in the first half of this year. The US administration’s approach to tariffs escalated progressively, culminating in the “Liberation Day” announcement in early April. In light of the trade-related rhetoric, there’s an increased probability of economic nationalism and repatriation of capital, which could trigger capital outflows from US financial assets into global fixed income. This suggests opportunities among potential beneficiaries like Europe, Japan, and China.

From a credit market perspective, investors may do well to consider European financials, which are largely insulated from the turbulent US trade dynamics and poised to benefit from German fiscal spending. Investors may also want to explore emerging market corporates, especially in sectors like utilities and telecoms, which may offer steady cash flows and low leverage. Another potentially attractive area of the credit market is convertible bonds, which may offer asymmetric upside. 

In terms of private credit, asset owners may still benefit from the potential illiquidity premium, despite market uncertainty. This said, we’d encourage investors to be thoughtful and stress test potential market outcomes as they consider their private credit options and size their allocations.

Equity

An important, open question about this new economic reality is whether we’re witnessing the winding down of US exceptionalism. At the same time, we appear to be transitioning away from an era of high synchronization and tight correlations between countries, which has significant implications for investors in terms of both the opportunity set and risk management. Keeping all one’s eggs in a US basket seems imprudent given this context.

So, where might investors turn if their portfolios have been concentrated in US equities? Among European equities, some value-oriented areas may benefit from the shifting economic backdrop. These include banks, telecoms, defense stocks, European small caps, and the enablers of the energy transition that are protected by high barriers to entry, such as grid operators. 

Japanese equities may benefit from several dynamics, such as increasing domestic investment, shareholder activism, wage growth, and a push toward automation and efficiency. Higher dividends and buybacks, as well as structurally higher inflation, are also contributing to a more positive environment. 

Small-cap equities in countries other than the US could benefit from trends toward deglobalization. Within this space, active managers with strong research capabilities may be well positioned to identify opportunities given that disparity, dispersion, and less sell-side coverage can help drive positive outcomes. 

Turning to private equities, specifically the venture capital space, our outlook has changed since the beginning of the year. The IPO market hasn’t reopened in the way we anticipated thanks to market volatility, but there are still opportunities to be found. Companies that are well capitalized, show significant growth, and have strong unit economics will likely see increased focus and have an easier road to financing. Those that lack these features are less likely to raise capital at attractive valuations. We believe this era of differentiation is an opportunity for investors with dry powder and the expertise, resources, and networks to identify potential long-term winners. 

The bottom line is that in a more volatile and slower-growth world, quality “stable compounders” — companies that exhibit consistent growth, resilience, and strong balance sheets, whether growth or value — may become increasingly appealing to investors looking for reliable returns.

Multi-asset investment implications

Looking across the multi-asset landscape, there are some important implications to consider: 

• We see a case for maintaining some risk in both global equities and credit
• The time may have come to position for equities outside the US potentially to outperform 
• Given divergent policies and economic outcomes, there may be a range of relative fixed income opportunities

As investors contemplate these points, they may do well to do so in the context of actively managed strategies, which are typically more flexible and adaptable in more uncertain market environments.