Monthly Asset Allocation Outlook

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.