Asset Allocation Outlook

We maintain an underweight view on US equities. While the market has rebounded quickly, persistent policy uncertainty, including on fiscal deficits, continues to pose downside risks. In our view, US equities remain vulnerable to setbacks, particularly if trade negotiations stall or fiscal measures disappoint. As such, we maintain our underweight stance and would look to re-engage on weakness.

We hold a modest overweight view on European equities on the back of a supportive fiscal outlook for the region and cooling inflation, which gives the European Central Bank room to act. However, we remain mindful of potential risks related to global growth dynamics and tariffs, which lead us to hold off on upgrading our view further for now.

We maintain a moderate overweight stance on Japanese equities, supported by structural tailwinds such as ongoing corporate governance reforms and buybacks. We remain mindful of Japan’s exposure to trade-related tensions and risks around JPY appreciation, but relative to other regions, we see more compelling opportunities and continue to express a preference for Japanese equities within our regional allocation views.

We still have a moderate underweight view on emerging market (EM) equities. While recent performance in China has been encouraging, broader geopolitical and trade-related uncertainties persistently cloud the outlook. We acknowledge the potential for upside scenarios but our defensive stance reflects the fact that most tariffs have not been repealed yet as well as the uncertainty of today’s trade-related policy.

Our perspective on US rates remains neutral. The recent post-downgrade volatility and sell-off in US Treasuries have since moderated, but fiscal risks have not dissipated and the Federal Reserve’s room for manoeuvre is limited. At current levels, we do not see compelling entry points and therefore we still hold a neutral view.

While we still adhere to our overall neutral stance on European duration, we have introduced a regional relative-value trade component to reflect diverging rate expectations. UK rates have priced in a more hawkish policy path, whereas pricing for the eurozone implies a more dovish outlook. To express this divergence, we have introduced a modestly overweight view on UK duration and an underweight view on eurozone duration.

We still have an underweight view on Japanese rates. The Bank of Japan remains behind the curve and with wage growth gaining traction and inflation proving sticky, we see limited scope for rate cuts in the near term.

Our neutral view on investment-grade (IG) credit remains unchanged. While we still see selective opportunities in high yield, we think it appropriate to hold off on engaging in the IG space, given current tight spreads and the potential for increased market volatility.

We maintain a modest overweight stance on high-yield credit. However, with spreads having tightened and risk assets having recovered quite far, we have moderated the risk posture at the margin. That said, we remain prepared to upgrade our view should a more compelling entry point emerge.

We remain neutral on EM debt, given the ongoing uncertainty surrounding global trade and geopolitical developments. Currently, we do not see attractive and compelling opportunities to enter, but we might consider upgrading our view in the event that positive developments on trade policy and geopolitics materialise.

We continue to have a neutral stance on oil. However, we see potential for lower oil prices, driven by global economic uncertainty and escalating trade tensions. Broader concerns around slowing global growth further reinforce the case for caution and make us more likely to consider a potential shift to an underweight view should these pressures intensify.

We hold a modest overweight view on gold as we continue to believe there is a structural case for the asset class to perform well due to stagflation risk, geopolitical risks and central bank buying. We remain poised to increase the magnitude of our overweight stance should a more attractive entry point emerge.

These asset allocation views are produced by Wellington Solutions Group, which provides client-centred investment solutions, research and advice ranging from whole portfolio solutions to bespoke single asset class and advisory partnerships. Our solutions platform incorporates expertise across multi-asset, fundamental factor investing and thematic approaches to deliver across a range of client outcomes and objectives. If you wish to discuss your investment challenges, and how Wellington Solutions can help, please contact your Wellington relationship manager or #solutions@wellington.com.