Asset Allocation Outlook

We moved to a neutral view on US equities. The US still offers one of the strongest earnings profiles across developed markets, supported by resilient profitability, AI-related capex and megacap technology leadership. However, following strong relative outperformance, we have dialled back our stance. We would look to shift back to a more positive view at more attractive entry points.

We continue to hold a modest underweight stance on Europe ex UK equities. Earnings momentum remains softer than in other regions, such as EM, while weak activity data and energy sensitivity weigh on the near-term macroeconomic outlook. A more subdued earnings backdrop and continued stagflation risks continue to support our underweight view.

We maintain a modest underweight view on UK equities, although we have reduced it slightly. Relative growth and earnings momentum remain less compelling than in areas such as EM, and the economy still has to contend with fiscal, political and inflation-related uncertainty. That said, supportive factors such as cheap valuations, buybacks and M&A activity argue for a smaller underweight stance.

We retain a neutral stance on Japanese equities. From a medium-term perspective, Japan still benefits from multiple positive developments including corporate reforms, wage momentum, improving nominal growth and exposure to the broader Asia technology cycle. However, uncertainty around the Bank of Japan’s policy approach and risks to China linked external demand warrant a more cautious near-term approach.

We retain our modestly overweight view on EM equities, supported by the strength of Asia technology, signs of stabilisation in China and a more favourable valuation backdrop relative to developed markets. The EM case is not dependent on a single driver, but spans themes such as the role of South Korea and Taiwan in the AI supply chain, improving policy support in China and continued domestic growth resilience in India. The recent outperformance argues for caution around sizing, but the relative opportunity remains attractive.

We moved from an underweight to a neutral stance on US rates. The US remains more exposed to inflation risk and fiscal uncertainty relative to regions such as the eurozone. However, the recent move in US-Germany yield differentials led us to shift to a neutral stance.

We shifted our view on European rates, and German yields in particular, from overweight to neutral. Germany remains our preferred regional play, offering strong rally potential given what we consider an overpricing of inflation risk and underpricing of growth downside. However, following market moves in US and German yields, we have neutralised our stance for now.

We retain a neutral view on Japanese rates. Japan remains in a reflationary regime, and we are also mindful of fiscal risks. However, much of this has already been priced in and uncertainty around near term policy execution means that we are comfortable remaining neutral for now.

We dialled back our view on investment-grade credit given the recent tightening in spreads. Corporate fundamentals remain resilient and all in yields continue to support income. However, with spread compression reducing the remaining upside, we prefer a neutral stance for now.

We moved to a neutral stance on high-yield credit. As with investment grade, spreads have tightened significantly, leaving valuations less compelling. While we would look to reassess our view on adding risk if spreads were to widen, we remain comfortable staying on the sidelines for now.

We remain neutral on EM debt. Fundamentals are still broadly supportive, but recent geopolitical developments, including the ongoing conflict in the Middle East, justify continued caution, especially given the absence of sufficiently compelling opportunities.