Monthly Asset Allocation Outlook

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2025-10-31
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The views expressed are those of the authors at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.

This is a monthly snapshot of our Multi-Asset Team’s asset allocation views as of September 2024. It covers global equities, bonds and commodities and complements the more detailed analysis we share in our Quarterly Multi-Asset Outlook.

Key*

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*Please note that we use a more detailed key in our Quarterly Multi-Asset Outlook.

Equities

Overweight: no change

US

Overweight: up

We have downgraded our stance on US equities to neutral. The recent rally, driven in part by a 50 basis points (bps) rate cut from the Federal Reserve (Fed) has pushed up US equity valuations and earnings expectations, which we now view as in line with our expectations. Despite the relative strength of the US corporate and macroeconomic backdrop, market reactions to Q3 earnings demonstrated that company expectations are fully priced in. In Q4, election outcomes present potential for pockets of volatility, and earnings may disappoint lofty expectations. Given these factors, we have a preference to take regional equity risk elsewhere.

Europe

Underweight: down

We still take an underweight view on European equities. European companies’ earnings are expected to be relatively lacklustre in the coming 12 months. The European economy remains weak relative to other developed markets and recent purchasing managers’ index data points towards flat near-term growth potential. Nevertheless, we think a tactical approach to European equities may be appropriate, as relative valuations remain attractive and prospects for Chinese stimulus the upside potential.

Japan

Overweight: no change

We retain our overweight view on Japanese equities. Japan was at the centre of recent equity market volatility and is still some way below its previous peak. We consider that much of this volatility was driven by technical dynamics — rather than fundamental weakness — and viewed this as an opportunity to add risk at lower levels. We believe the structural case for Japanese equities, including an improving macro backdrop and corporate reforms, remains largely intact.

Emerging Markets

Underweight: down

We still have an underweight view on emerging market equities. This view is largely driven by our cautious outlook for Chinese equities. Recent stimulus measures have driven a sharp rally in Chinese equities and may put a floor under valuations, but structural headwinds persist for Chinese assets. Moreover, we expect trade tensions with the US to weigh on the outlook ahead of November’s US elections.

Government bonds

Neutral: no change

US

Neutral: no change

We remain neutral on US rates. The Treasury market now prices 150bps of additional rate cuts by the end of 2025, which we view as fair value. We expect the Fed to remain data dependent from here as inflation and labour market data evolve, given the low likelihood of a recession.

Europe

Neutral: no change

We maintain a neutral view on European government bonds within our core duration allocation. European growth remains challenged, and we think disinflation across the euro area has further to go. We see some risk associated with fiscal policy and term premia in France. However, we view current pricing as reflective of the likely policy path from here.

Japan

Neutral: no change

Our view on Japan remains neutral, given our expectation that the Bank of Japan (BOJ) will bide its time as it looks to normalise policy. After recent volatility, we continue to monitor the narrative from the BOJ for signals about what will happen next. We anticipate top-line Japanese growth staying weak and inflation slowing. Nevertheless, we still agree with the narrative that Japan will, over time, phase out extraordinary monetary easing.

Credit spreads

Overweight: no change

Investment-grade credit

Neutral: no change

We anticipate that spreads will likely remain range-bound, with little room for further tightening. As a result, we see little potential for capital gains — hence our neutral view in favour of high yield.

High yield

Overweight: no change

We still have an overweight view on high-yield relative to investment-grade credit. We expect high-yield debt to benefit from better overall conditions for risky assets. While spreads remain tight, total income provides a significant cushion against spread widening in the absence of a significant rise in default rates, which is not our base case.

Emerging Markets

Neutral: no change

We maintain our neutral view on emerging market debt (EMD). While we still expect low growth in emerging market economies, we now see a lower return differential between different credit assets. We expect the Fed’s cutting cycle to provide a tailwind for the asset class and, with many of the idiosyncratic stories having now played out, we believe EMD is fair value at current prices.

Commodities

Neutral: down

Energy

Neutral: down

We have upgraded our view on energy markets to overweight. Prices have been pressured by growth concerns, and we believe oil is close to medium-term fair value. In our view, positive roll yield and diversification benefits in a multi-asset portfolio justify a limited overweight.

Gold

Overweight: up

We have also switched to an overweight view on gold markets. Gold has seen significant price appreciation and benefits from a number of ongoing tailwinds. It has also reasserted its “safe-haven” and store-of-value role as term premia rise, given funding challenges for the US and Europe. In addition, a reversal in monetary policy should benefit gold as investors reengage with the asset.

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Disclosure

For professional and institutional investors only. All investing involves risk. Investment markets are subject to economic, regulatory, market sentiment and political risks. All investors should consider the risks that may impact their capital, before investing. The value of your investment may become worth more or less than at the time of the original investment. If the strategies do not perform as expected, if opportunities to implement them do not arise, or if the team does not implement its investment strategies successfully, then a strategy may underperform or experience losses. Past performance is not a reliable indicator of future results and investments can lose value.

This material is prepared for, and authorised for internal use by, designated institutional and professional investors and their consultants or for such other use as may be authorised by Wellington Management. This material and/or its contents are current at the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Wellington Management. This material is not intended to constitute investment advice or an offer to sell, or the solicitation of an offer to purchase shares or other securities. Investors should always obtain and read an up-to-date investment services description or prospectus before deciding whether to appoint an investment manager or to invest in a fund.

Any views expressed herein are those of the iStrat Multi-Asset Team, are based on available information and are subject to change without notice. Individual portfolio management teams may hold different views and may make different investment decisions for different clients. While any third-party data used is considered reliable, its accuracy is not guaranteed.

This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Past performance does not guarantee future results.

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