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By  Yoram Lustig, CFA®
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Global Asset Allocation: The View From the UK

Discover the latest global market themes

January 2025 -

1. Market Perspective

  • While global growth remains broadly resilient, with inflation trending lower, paths forward will vary as uncertain policy impacts create divergence.
  • US growth expectations are higher on the back of pro‑growth policies, despite concerns they could be inflationary and disrupt recent trends lower. European, UK and Japanese growth remains soft. Chinese policymakers pledge additional stimulus and reforms to support the economy in the new year.
  • The US Fed delivered a hawkish cut, pivoting back to inflation concerns, while the European Central Bank is likely to act faster amid the economy facing weaker growth and lower inflation. The Bank of England (BoE) is likely to cut rates quarterly, but recent volatility in the gilt market may impact its decisions. The Bank of Japan (BoJ) is expected to remain on its divergent path, with incoming inflation data supporting further hikes.
  • Key risks to global markets include elevated uncertainty around policy changes, central bank missteps, geopolitical tensions and a reacceleration in inflation.

2. Portfolio Positioning

As of 31 December 2024

  • We maintain a modest overweight to equities versus bonds given a favourable fundamental outlook, although constrained by valuation considerations and potential policy crosscurrents.
  • Despite broadly elevated equity valuations, we find opportunities beyond large‑cap growth attractive, while bonds remain vulnerable to higher rates.
  • Within equities, we favour more cyclical, value‑oriented areas of the market supported by easing monetary policy and resilient growth, notably in the US, that could see further support through policy changes.
  • We maintain an overweight to cash relative to bonds. Cash yields remain attractive, but should be monitored as the BoE eases its policy rate.
  • Within fixed income, we continue to see value in higher yielding sectors, such as global high yield and emerging market debt. Despite rich valuations, all‑in yield levels remain compelling and provide a buffer should spreads widen. Fundamentals remain attractive, with still modest default expectations.

3. Market Themes

Finding middle ground

Entering the new year with US large‑caps continuing their dominance, led by a narrow set of names, has investors once again asking when, if ever, a broadening in participation will take hold. We certainly had fits and starts last year with smaller companies outperforming in July when markets were expecting a very dovish Fed, only to quickly unwind. They again came to life post‑election in hopes for supportive policies, including deregulation and lower corporate taxes, only to fade once again as large‑caps dominated into year‑end. As we face heightened uncertainty around policy changes, inflation, rates and the Fed’s reaction to each, mid‑cap equities stand out. Mid‑cap relative valuations remain attractive versus large‑caps, and relative to small‑caps, they are less vulnerable to higher rates, deliver more profitability and have less exposure to concentrated sectors. As we continue to anticipate a broadening in the market, the ‘middle ground’ should be well‑positioned to participate.

Flip‑flop

Just a few months ago, the Fed’s narrative around easing policy began to shift towards stabilising the labour market as it showed comfort with the decelerating path of inflation. The Fed seemed to flip‑flop on that at their December meeting, taking a more hawkish tone on inflation, even as they lowered rates. The seemingly abrupt shift in tone caught markets a bit by surprise as they expected the ‘data‑dependent’ Fed to need a more notable reversal in trends for such an abrupt change. What was notable before they met was the outcome of the US election, which markets quickly reacted to, speculating on the future impacts of policy changes. It seems like the Fed is now taking these risks into consideration as they make their policy decisions, which could further increase uncertainty on the path for rates.

 

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

Yoram Lustig, CFA® Head of Multi-Asset Solutions, EMEA & Latam

Yoram Lustig is the head of Multi-Asset Solutions, EMEA and Latin America, in the Multi-Asset Division. He also is a portfolio manager and the chair of the UK and European Investment Committees.

By  Sébastien Page
Nov 2024 On the Horizon

2025 Global Market Outlook

By  Eric L. Veiel, Nikolaj Schmidt, Blerina Uruçi, Ross Abaya, Justin Thomson, Stephon Jackson, Kenneth A. Orchard, David M. DiPietro, Nabil Hanano, Dominic Rizzo, Timothy C. Murray

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