Global Asset Allocation: The View From Europe

Outlook

• Our view on risk assets remains balanced, with fiscal stimulus and accommodative central bank policies helping support economic growth against a backdrop of elevated valuations, where a lot of good news has been priced in.
• US economic growth is underpinned by ongoing fiscal spending and the potential for further Fed easing, though the outlook remains uncertain amidst limited economic data and a lack of clarity around tariff impact.
• Outside the US, growth is supported by fiscal and monetary stimulus helping offset potential weakness from tariffs. Despite the political uncertainty in France, increased fiscal spending in Germany should lead to stronger economic growth in Europe over the medium term. A de‑escalation in trade tensions and pro‑growth policy shift are improving sentiment towards China.
• Key risks to global markets include sticky inflation, potential policy missteps by central banks, a weakening labour market, lingering trade tensions and ongoing geopolitical tensions.

Themes Driving Positioning

Driving in the fog

The Federal Reserve’s latest 25‑basis‑point rate cut and decision to end quantitative tightening were widely anticipated, yet the underlying dissent amongst Federal Reserve voting members underscores growing uncertainty about the economy’s trajectory. With one member advocating for a more aggressive 50‑basis‑point cut and another opposing any reduction, the Fed is clearly wrestling with conflicting signals, exacerbated by limited economic data. This led Chair Jerome Powell to caution that a December cut is not guaranteed amidst the ‘fog’. Markets responded by dialling down rate cut expectations, but still with little clarity in the direction of the economy and more concerns about the direction within the Fed. It’s tough enough driving in the fog, but it’s even worse when everyone in the car wants to go in a different direction.

Reason for the jitters?

After a near 40% uninterrupted run higher off early April lows around Liberation Day, US equity markets have been a bit more jittery as of late. High valuations, scrutiny around artificial intelligence (AI) spending and a more recent focus on debt financing for AI infrastructure have been highlighted as catalysts of concern. Adding to these worries has been the ongoing US government shutdown, incoming private data showing a weakening labour market, slumping consumer confidence and the direction of the Fed mired by a lack of information. On the flip side, earnings growth remains robust, mergers and acquisitions (M&A) activity has picked up and the narrative around supportive fiscal and monetary policy still holds. AI spending, however, has been the primary driver of economic growth, earnings and market performance, offsetting weakness elsewhere in areas like housing, manufacturing and the labour market. Given these imbalances, we remain broadly neutral across risk assets and cognisant of the growing bifurcations across the economy.

 

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