Asset Allocation Outlook

We shifted to an underweight view on US equities. Policy uncertainty remains elevated and the current pricing is no longer reflecting the same degree of uncertainty as before, yet we believe uncertainty remains quite significant. We expect to see continued softness in survey data before the hard data starts to weaken around mid to late summer. Elevated macro volatility from US policies and the expectation of valuations compression led us to shift to a modest underweight view. 

We have upgraded our view to a modest overweight on European equities. While tariffs are a concern, there is potential upside from fiscal stimulus and investment, which leads us to believe that recent outperformance has the potential to be sustained.

We moved to a moderate overweight stance on Japanese equities, encouraged by positive macroeconomic data coming from Japan, including on wages. Solid earnings growth, attractive valuations and ongoing improvements in shareholder returns and governance further support our view, prompting us to cautiously upgrade our stance to overweight.

We have downgraded our view on emerging markets (EM) equities to a moderate underweight. Despite reasonable valuations in Chinese equities, geopolitical and trade risks heighten uncertainty, and policies are likely to remain reactive to counter external shocks. Additionally, we see many EM countries being heavily exposed to additional tariff risks implications, informing our defensive stance.

We remain neutral on US rates. Yields appear to be fairly priced over a 12-month horizon. Despite the likelihood of an economic slowdown and potential recession, the Federal Reserve will be constrained to some extent by sticky/higher inflation, although some rate cuts are likely.

We remain neutral on European rates. The European Central Bank is likely to have more flexibility than the Federal Reserve, as the still weaker euro and a slowing economy are likely to keep inflation low in the euro area. On balance, however, we prefer to remain neutral, waiting for a better entry point.

We moved to a modest underweight view on Japanese rates. Although the domestic economy continues to improve, the Bank of Japan is still well behind the curve. With wages increasing and inflation remaining sticky, we do not anticipate cuts.

We maintain a neutral stance on investment-grade (IG) credit. While we see opportunities in the high-yield segment, these tend to be more idiosyncratic, and the IG segment still has tight spreads. Overall, we prefer to remain neutral in investment grade.

We have a modestly overweight view on high-yield credit and increased our stance at the margin, given the elevated yield on offer and credit quality that is still skewed towards higher-rated credit. In addition, we do not anticipate significant default cycles, giving us comfort in our current stance.

We maintain our neutral view on EM debt. Currently, we do not see attractive and compelling opportunities to enter, which, coupled with elevated geopolitical risks, drives our neutral stance.

We maintain our neutral stance on oil. With OPEC+ announcing increased supply, we remain cautiously tactical in this space and are comfortable in maintaining a neutral stance for the time being.

We moved to an overweight view on gold. A weak US dollar, central bank buying and sentiment-driven demand have bolstered gold prices and may continue to sustain the rally, despite extended valuations on some measures.