Asset Allocation Outlook

We still take a neutral view on US equities. The S&P 500 Index appears expensive when evaluated using traditional valuation metrics. However, when adjusted for declining interest rates and long-term earnings growth potential driven by AI, the US index appears closer to fair value. Earnings growth remains strong, driven largely by mega-cap technology names. However, we expect this to broaden to other sectors considering a constructive macroeconomic backdrop.

Our view on European equities remains neutral. European growth appears to have troughed. In addition, the European Central Bank has initiated policy loosening, which should further boost risk sentiment towards European assets. French and UK elections present the potential for increased volatility; however, the medium-term impact on asset prices appears limited at this point.

We maintain our neutral view on Japanese equities, which have experienced significant outperformance in recent quarters, relative to global equities. While we view the structural case as largely intact, higher valuations, monetary tightening by the Bank of Japan (BOJ) and a potentially stronger yen present near-term headwinds for relative performance. 

Our outlook for emerging markets (EM) equities remains neutral. Cyclical and structural headwinds persist for Chinese assets. However, earnings are starting to stabilise and valuations remain attractive. Balancing these factors, we see a wide range of potential outcomes for EM equities in this environment and lean towards a neutral stance.

Our US rates outlook is neutral. Recent upside inflation data surprises have driven market repricing in rates, with markets now pricing in less than two US rate cuts this year. We think that the round trip in US 10-year yields since early 2024 presents a more balanced reflection of the outlook for US policy. 

We still have a neutral view on European government bonds. We believe disinflation across the European Union has further to go and we see less risk associated with fiscal policy and term premia. Uncertainty around elections in France leaves non-core spreads vulnerable to near-term weakness and volatility.

We maintain a neutral view, given our expectation that the Bank of Japan (BOJ) will remain patient as it looks to normalise policy. Top-line Japanese growth remains weak, and we are seeing slowing inflation. Nevertheless, we still agree with the narrative that Japan should, at some point, phase out extraordinary monetary easing.

We anticipate that spreads will likely remain range-bound, with little room for further tightening. As a result, we see little potential for capital gains, hence our neutral view in favour of high yield.

We still have an overweight view on high-yield relative to investment-grade credit. We expect high-yield debt to benefit from better overall conditions for riskier assets. While spreads remain tight, total income provides a significant cushion against spread widening in the absence of a significant rise in default rates, which is not our base case.

Our view on EM debt is underweight, primarily due to the expected continuation of low growth in EM economies. We see more limited opportunities for tightening across EM high yield. While the return of weak issuers to the primary market has boosted sentiment, flows have been limited. Continued strength in the US dollar remains an additional headwind for the asset class.

In energy markets, our view remains marginally overweight. Oil looks fairly valued, with prices in the mid US$80s. However, a positive roll yield — which reflects the lower cost of longer-dated futures — and heightened geopolitical risk warrant a more constructive stance.

We still have a neutral outlook on gold markets. Gold has meaningfully outperformed real rates over the recent inflationary period, which, in our view, limits further price upside from here. A punitive roll yield requires a substantive price appreciation to justify any overweight.