Allocation Views: Measured conviction

Preview

In this month’s Allocation Views, we remain positive on risk assets moving into November, as the central tenets of our bullish investment thesis remain in place, despite a variety of factors that threaten to destabilize our view.

Questions around the shape of economic growth have combined with recent US-China trade tensions to challenge our conviction, but these concerns do not outweigh solid macro and corporate fundamentals, in our opinion.

As a result, we adopt a tactically bullish approach across our portfolios, staying risk-on while keeping a close eye on macro and market developments.

Macro data aside, the most convincing argument for our bullish conviction is the ongoing strength of corporate fundamentals, supported by encouraging third-quarter (Q3) earnings results.

From a cross-asset perspective, we have balanced this stance by maintaining our pessimism toward fixed income. We also retain optimism toward commodities, noting that gold may act as a useful inflation hedge.

Macro themes

A resilient growth story

• Leading economic indicators remain resilient, driven by strong services growth.
• Improving sentiment and clarity around tariffs have supported earnings growth and guidance, evidenced by positive Q3 reporting.
• The US economy has proven robust, but we continue to monitor labor-market dynamics for further signs of weakness. US and China trade tensions are also a factor.

Balanced inflation outlook

• Inflation remains above central bank targets in most developed economies. We expect inflation to remain tricky through the end of this year, influenced by tariffs.
• US companies are currently absorbing tariff-induced inflation pressures by tightening margins. An additional material impact on core goods inflation is likely.
• However, services inflation has moderated, helped by lower housing costs, and should offset pressures elsewhere.

Policy leans supportive

• We expect the US Federal Reserve (Fed) to continue to cut interest rates, but we think longer-term expectations for cuts are lofty relative to resilient growth and a balanced inflation outlook.
• Fiscal policy in major economies is becoming an increasingly influential driver of asset prices, notably the US tax bill and stimulus measures in Japan and Germany.
• Despite perceived political influence, we believe the Fed will maintain an objective approach to monetary policy. In Japan, weak growth and political dynamics may hinder policy tightening.

Portfolio positioning themes

Responsibly bullish

• Several major central banks are currently easing into strengthening economies, offering a tailwind to risk assets.
• Equity market momentum is supported by positive earnings revisions and guidance, which outweigh emergent market and political risks, in our view.
• Despite the recent rally in equities, sentiment appears surprisingly neutral. Positioning also remains restrained, leaving room to add exposure.

Diversified equity risk

• We retain our optimistic view of US large-cap stocks, relative to small-cap names. Robust earnings and a supportive macro backdrop guide our thinking.
• We upgrade our view on Japanese equities to neutral, helped by corporate reforms and a repatriation of domestic assets. We downgrade UK equities, influenced by a weak macro backdrop and fiscal tightening.
• We retain a neutral view on Chinese equities, as a technology rally and positive artificial intelligence (AI) trends fuel markets. Sustained retail activity is also a factor.

Underweight government bonds

• We believe longer-term market expectations for Fed policy easing are optimistic. This maintains upward pressure on yields, curtailing our preference for US duration.
• Concerns around fiscal sustainability have driven higher term premia in US Treasuries, increasing the possibility of a supply-demand imbalance.
• Within fixed income, we prefer UK Gilts and Canadian government bonds, amid weak labor markets. We remain underweight Japanese government bonds.