Asset Allocation Outlook

We retain our modest overweight view on US equities. Earnings remain strong, with a supportive starting point, and have continued broadening across the market. The US also appears well positioned to benefit from ongoing strength in the AI theme, while the recent valuation reset — particularly within large cap technology — has helped ease prior valuation headwinds. Taken together, this supports our continued positive view on US equities.

We maintain a modest underweight stance on Europe ex‑UK equities. We continue to see limited evidence of improvement in the region’s relative earnings outlook, with the eurozone more likely to be impacted by an increasingly stagflationary environment, leading to weak earnings growth. In our view, the balance of risks remains skewed to the downside, supporting our underweight view.

We retain a modest underweight view on UK equities. As with the eurozone, the UK faces a relatively softer earnings backdrop, which we expect to remain constrained by potential stagflationary pressures linked to developments in the Middle East. In this context, we continue to view UK equities as relatively less attractive compared with, for example, emerging markets, where we see greater upside.

Our stance on Japanese equities remains neutral. The domestic policy backdrop continues to be supportive — including the potential for further fiscal measures to underpin growth — and we still see scope for positive excess returns over the medium term. At this stage, however, we are comfortable maintaining a neutral stance, while retaining the flexibility to become more constructive should valuations or market dynamics become more compelling.

We modestly increased our overweight view on emerging markets (EM) equities. We remain constructive on the AI supply chain — a key support for EM equities, particularly in Korea and Taiwan — while early signs of China emerging from deflation further strengthen the outlook. Following recent underperformance, India also appears well positioned for a recovery. Overall, this leaves us incrementally more constructive on the region.

We moved to a modest underweight stance on US rates. In our view, US yields are likely to remain broadly range-bound, yet markets appear to be pricing limited inflation risk. The US Federal Reserve remains relatively dovish versus other central banks, while risks around persistently large budget deficits continue to build.

We upgraded our stance on European rates to modestly overweight, primarily driven by our positive outlook for German rates. In our view, markets remain narrowly focused on oil shock driven inflation risks in the eurozone, overlooking that the region entered this phase with below-target inflation, a highly credible central bank and a stronger fiscal position than many of its peers. This reinforces our overweight view on the region, specifically relative to the US.

We moved from an underweight to a neutral stance on Japanese rates. While the reflationary backdrop remains intact — supported by tight labour markets, elevated inflation expectations and fiscal policy — much of this is already reflected in valuations, so we remain comfortable with a neutral view for the time being.

We maintain a modest overweight view on investment grade credit, particularly in Europe, where we see healthier balance sheets and less direct exposure to areas currently under scrutiny, including segments of private credit and elevated technology-related issuance.

We hold a modest overweight stance on European high-yield credit, while remaining selective. We continue to favour Europe, given its higher credit quality and stronger fundamentals, with attractive carry and rolldown providing a supportive backdrop.

We remain neutral on EM debt. While underlying fundamentals remain broadly solid, spreads have tightened materially — and by more than in developed markets — despite the Iran conflict increasing downside risks and the potential for balance sheet deterioration across parts of the EM space. This leaves us comfortable maintaining a neutral stance for now.