Global Asset Allocation: The View From UK

Outlook

• We modestly increased the overweight to global risk assets, funded from cash. Though valuations are extended, earnings momentum and economic growth remain favourable, underpinned by still‑accommodative fiscal policies across most regions.
• US economic growth remains resilient, fuelled by artificial intelligence (AI)‑driven capital spending and supportive fiscal policy, although the labour market data continue to reflect a softening.
• Markets outside the US continue to benefit from improving fundamentals, supported by fiscal spending, notably in Europe and Japan, and more attractive valuations, particularly in the UK.
• Key risks to global markets include any threat to AI‑driven growth, sticky inflation, a sharper‑than‑expected deterioration in labour markets, shifting policy expectations and persistent geopolitical tensions.

Themes Driving Positioning

A surprising Fed nomination

The nomination of Kevin Warsh as Federal Reserve chair has introduced fresh uncertainty into an already delicate monetary policy backdrop. Markets initially recoiled on the news, seeing Warsh as more hawkish given his past criticism of quantitative easing and the zero interest rate policy adopted after the global financial crisis. Given the ongoing pressure from the administration to lower rates, Warsh seemed like an odd choice, given he was perceived to be the most hawkish amongst the potential candidates. And whilst he may have had hawkish views in the past, his recent comments on deflationary impacts of artificial intelligence (AI)‑related productivity and tariffs being a one‑time hit to inflation suggest a more dovish view. However, those softening inflation views could be challenged as fiscal policy tailwinds begin to hit what appears to be an already resilient economy. With this still clouded backdrop and even more division expected among the Federal Open Market Committee, we think the new Fed chair may surprise the market.

Resistance

Despite still broadly positive AI‑related news, market sentiment has turned more cautious. Large‑scale capex commitments to fund AI growth that had been cheered last year are now being met with greater scepticism as investors question the return on investment. Whilst the AI theme has broadened to support different parts of the market, other sectors that might be disrupted by AI—notably software companies—have found themselves in the crosshairs. The sector has been hit by fears that AI technology could displace software services and data analytics firms, with companies potentially developing their own in‑house solutions using AI. The combined concerns over AI spending and potential disruption have pressured the technology sector, leaving it trailing most sectors of the market. As valuations continue to reset, we would expect investors to reengage given the still powerful growth potential for AI. However, perhaps we’ve reached a healthy point of resistance where investors are becoming more selective in distinguishing potential winners and losers.

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