Global Asset Allocation: The View from Europe

Outlook: New world order

• We remain near neutral on risk assets, balancing the impacts of trade as well as fiscal and monetary policy support on global growth.
• US growth expectations are modest, with tariff policy a headwind, while the consumer remains resilient and a potential lift from fiscal policy is expected. Meanwhile the Fed remains on hold with a cautious eye on inflation.
• Economies outside the US face slower growth, but have more monetary policy flexibility given better progress on inflation. Increased fiscal policy spending is also underpinning growth in some regions, including Europe and China.
• Key risks to global markets include the impacts of global trade tensions, the threat of higher inflation, central bank missteps and ongoing geopolitical tensions.

Themes driving positioning

Rose‑coloured glasses

One would think the prevailing narrative of ongoing trade disputes, intensifying geopolitical tensions, ballooning fiscal deficits and rising interest rates would cast a shadow over risk assets. That hasn’t been the case as markets are now trending near record highs and have not looked back since the post‑Liberation Day trough. Investors seem to be viewing the markets through a different perspective, either expecting many of these risks to fade with little impact or anchoring on pockets of positives. For those optimists, artificial intelligence spending concerns have receded, earnings have largely held up, inflation is not yet showing any impacts from tariffs and fiscal spending is on the rise. Moreover, a more pragmatic approach to trade policies, thus far, could also be seen as a positive. Either way you view it, equity market valuations are back to reflecting a very rosy outlook, despite very few of the downside risks having gone away, warranting caution should things disappoint.

Independence day?

Following a string of public attacks on Fed Chair Jerome Powell for not lowering interest rates despite lower inflation, President Trump is now threatening to name his replacement despite Powell’s tenure not ending until May 2026. The idea that a successor could be named well in advance of Powell stepping down could create a chaotic environment. Should it happen, Powell could be perceived as a lame duck and markets would look to the incoming chair for guidance on future policy. While the Fed doesn’t always get policy right, its independence is critical to maintaining the credibility of US financial markets and assets. Some have pointed to concerns over the future independence of the Fed as the reason why US Treasuries and the dollar have declined. As the US celebrates its independence, investors may be in for more uncertainty ahead should we end up with a shadow chair perceived to be driven by political versus economic policy.

 

For a region-by-region overview, see the full report (PDF).