Making the most of the new economic era’s bright spots

In an environment dominated by geopolitical instability and macroeconomic fragility one of the greatest challenges for investors is how to separate noise from signal. This uncertainty can hinder decision making and lead to inertia in portfolio allocations. However, while investors have to prepare for what can go wrong, they should also prepare for what can go right. Amidst these challenges, we believe there are still good reasons to be optimistic about the opportunity set available to investors. By focusing on structural trends and considering a wide range of views, investors can position portfolios for positive long-term returns while also managing the complexities of the current economic era and the market volatility that comes with it.

The case for optimism

Despite market turmoil and the prevailing market narrative around uncertainty — which we don’t disagree with — there are important factors that justify a more optimistic approach.

1. While inflation remains above target, the volatility in month-on-month readings has fallen against a backdrop of slowing but still healthy global growth (Figure 1). Despite the possibility of recurring volatility, a regime of higher nominal growth, with the potential for increasingly stable inflation, is taking shape, which we believe should prompt a renewed look at asset allocation across a global opportunity set.
2. Central banks are navigating a new paradigm in the growth/inflation trade-off. This dilemma could be exacerbated by the impact of tariffs and brings with it two key implications for investors: rates are likely less responsive to growth shocks and investors are likely to experience a more divergent regional backdrop. Credit spreads have widened on the back of economic uncertainty but higher starting yields create a favourable environment for fixed income investments, providing a compelling and complementary alternative to equities for total returns. 
3. While heightened volatility and emerging uncertainty are likely to affect consumer and corporate spending, a still resilient growth backdrop, may continue to provide a supportive enough environment for select equity allocations. As the impact of tariffs has created significant uncertainty for large segments of the equity market, diversifying the opportunity set across regions, sectors and individual securities will be key. Investors can root themselves in the fundamentals by focusing on the cycle, earnings, and robust research at the security selection level.

Figure 1

How best to put these insights together in an investor portfolio will naturally depend on specific circumstances, but here are some broader considerations that we think are worth bearing in mind.

Get more from your bond allocation

After very challenging years, 2024 saw bonds deliver solid total returns, with investors increasingly confident that fixed income can continue to play a critical role in providing positive, diversified returns to a portfolio. However, the current environment presents a diverse set of opportunities for bond investors. In uncertain markets, dynamic approaches such as sector rotation or flexible strategies can capitalise on emerging opportunities. This means that volatility, rather than being a source of fear, can become a valuable tool in an investor's toolkit. The current environment, with its attractive yields, offers an opportunity for fixed income investors to achieve both income and diversification — provided their bond allocation is working hard enough. 

Think differently about equities

A world where relatively high nominal growth can be sustained presents opportunities for equity investors, even in the face of heightened volatility, concerns about the potential impact of global tariffs and residual market concentration challenges. By expanding the opportunity set beyond US large-cap stocks, investors can balance still supportive US corporate fundamentals with other promising equity stories. We believe a quality focus, targeting well-priced, global companies with good fundamentals and exposure to structural trends, may represent a sweet spot for growth and uncover underappreciated opportunities. Quality has also been shown to be linked to a greater chance of outperformance in high-inflation regimes (Figure 2). Additionally, we have reason to believe that companies with high financial returns and the ability to sustain them through stewardship — evidenced by robust governance and a commitment to balancing stakeholder interests — may have an edge when it comes to navigating macroeconomic volatility over the long term. Finally, we are of the opinion that listed infrastructure — with its built-in exposure to long-term trends and inherent inflation sensitivity — may offer compelling investment opportunities, especially given low relative valuations for US utilities.

Figure 2

Add balance with high yield

An uncertain macroeconomic backdrop has the potential to continue to lead to wider credit spreads and increased dispersion in the near-term – but also an “under-appreciated” opportunity to generate alpha in high yield. This asset class, sometimes overlooked, offers a blend of growth potential and risk mitigation. By incorporating select high-yield investments into their portfolios, investors can aim to achieve a balanced approach that leverages the benefits of both equity and fixed income markets.

How to find resilience and opportunity in the new economic era

In conclusion, while uncertainty remains a defining feature of the current economic era, we believe there remain good reasons for investors to adopt a more optimistic outlook. By focusing on structural trends and market opportunities, investors can navigate the complexities of the market and position themselves for potential gains amid volatility. Whether through core fixed income, equities, or high-yield credit, a balanced and diversified approach can help investors achieve their financial goals.

As we navigate this new economic era, it is crucial for investors to remain vigilant and proactive but also to embrace the opportunities presented by structural trends and market dynamics. Diversify your portfolio, stay informed, and be prepared to adapt to changing conditions. By doing so, we believe you can seek to turn uncertainty into opportunity and maximise exposure to the bright spots that can help you achieve long-term financial success.

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