Asset Allocation Outlook

We still have an underweight view on US equities. While the economy remains resilient and corporate earnings have been solid, we are mindful of persistent uncertainty surrounding the implications of tariffs, which reflects in our positioning. Stretched equity valuations reflect excessive optimism and market breadth remains narrow, reinforcing our underweight stance.

We have neutralised our modest overweight stance on European equities. Fiscal stimulus in Germany and improving macroeconomic indicators offer some tailwinds; however, much of the positive news appears to be already reflected in current valuations. Progress on trade negotiations remains limited, and the ongoing Russia-Ukraine conflict continues to cloud the outlook. With reduced potential for excess returns, we have adjusted our view accordingly.

Our stance on Japanese equities remains moderately overweight, supported by ongoing corporate governance reforms and buyback activity. The macroeconomic backdrop continues to be favourable, underpinned by upward revisions to GDP forecasts and sustained wage growth, although a stronger currency has weighed on earnings expectations. Given the constructive medium-term outlook, we continue to express our preference for Japan within our regional equity allocation views.

We have turned more constructive on emerging markets (EM) equities, upgrading our view to neutral. A softer US dollar and ongoing disinflation create a supportive backdrop for risk assets in the region. Signs that US-China tensions may have peaked are also encouraging. With valuations still compelling, EM equities are beginning to reassert their appeal.

We have kept our neutral view on US rates. Although tariffs could contribute to a temporary slowdown in growth and therefore prepare the ground for lower rates, they also risk driving up import prices, potentially reinforcing inflationary pressures. Coupled with persistent fiscal imbalances, this may limit the Federal Reserve’s ability to ease policy. At current levels, we prefer to maintain a neutral stance and await a more compelling entry point.

In Europe, while our overall duration stance remains neutral, we continue to see potential in relative value trades to capture intra-regional pricing differentials. We maintain a modest overweight view on UK duration, where slowing wage growth, softening labour market and GDP data have increased the likelihood of sequential rate cuts. This is paired with a modest underweight view on eurozone duration, where the European Central Bank appears closer to the end of its cutting cycle.

We maintain an underweight stance on Japanese rates. Firm wage momentum and rising inflation expectations are likely to keep upward pressure on yields, reinforcing our positioning.

We continue to adopt a neutral stance on investment-grade (IG) credit. While we think there remain selective opportunities in high yield, we favour holding off from adding IG exposure at this stage due to tight spreads.

We still have a modestly overweight view on high-yield credit. While fundamentals continue to be supportive, the risk-reward profile has become less compelling. In our view, the recent tightening in spreads may reflect excessive optimism, particularly amid ongoing uncertainty around tariffs. As such, we remain cautious about adding further risk.

We take a neutral stance on emerging market debt, reflecting the continued uncertainty around global trade and geopolitical tensions. At present, we do not see sufficiently compelling opportunities to shift our stance. However, should we see meaningful progress on trade policy or geopolitical fronts, we would consider revisiting our view.