Global Asset Allocation: The View From Europe

Outlook

• Markets have remained largely resilient despite ongoing geopolitical tensions continuing to threaten higher inflation and weigh on growth, leading us to modestly trim European equities, because Europe may be more sensitive to global energy prices on a relative basis.
• The global economy continues to show pockets of resilience, supported by a steady consumer, fiscal spending, and ongoing investment, particularly in artificial intelligence (AI), though growth is moderating and becoming more uneven across regions. 
• Monetary policy remains steady with central banks largely in a holding pattern as they assess the path of inflation, while near‑term inflation pressures persist in some areas, longer‑term expectations remain relatively contained. 
• Key risks include a further escalation in geopolitical tensions, renewed inflationary pressures, greater reliance on a narrow set of growth drivers, potential labour market deterioration, and emerging liquidity concerns in parts of private markets.

Themes Driving Positioning

America’s market moat

We have neutralised our US equity underweight, as stronger earnings momentum, economic resilience reinforced by AI leadership, better energy insulation, and supportive fiscal policy improve the relative case. Earnings revisions are accelerating more quickly in the US, with earnings per share (EPS) growth expected to reach its strongest pace since the COVID‑19 rebound. AI leadership remains US‑centred, but its depth extends beyond semiconductor demand and into power generation, data centre construction, supporting infrastructure, and broader capital goods, strengthening the domestic capital spending backdrop. The US is also better insulated from a Strait of Hormuz shipping disruption, given its status as an energy exporter and lower risk of shortages relative to Europe, Australia, and parts of Asia. Fiscal policy, including measures under the ‘One Big Beautiful Bill,’ should continue to support domestic demand. While non‑US equities benefit from cheaper valuations and increased defence spending, the US ‘moat’ of stronger earnings momentum, AI leadership, energy insulation, and policy support is increasingly compelling.

 

Blind spot

Inflation risks represent a potential market blind spot, given uncertainty around the persistence of the energy supply shock. Two months into a near‑complete shutdown of the Strait of Hormuz, oil movement remains severely disrupted, creating regional shortages and broader price pressures reflected in gasoline, jet fuel prices, and utility bills, which feed through to consumers and businesses. Gulf states are also major fertiliser suppliers; shortages could add another layer of pressure through higher food prices. While markets are hopeful for a quick resolution, oil flows may still take several months to return to pre‑war levels, suggesting this shock may not fade quickly. At the same time, energy, defence, and infrastructure spending, as well as AI‑related demand for more power, data centres, equipment, and labour are additional inflationary forces in the US. Despite these risks, longer‑term inflation expectations remain in line with pre‑war trends. Barring a recession, inflation prints could surprise higher and weigh on activity. Against this backdrop, we have retained our inflation protection positioning.

 

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