While there are always risks in markets, from here, it seems like things are pretty good right now for global multi-asset investors. Growth is generally at or above trend, inflation continues to moderate, households and corporates are in good shape and the rate-cutting cycle is either here (in the case of the European Central Bank) or likely coming soon (Fed and the Bank of England).
Many clients we speak with are taking advantage of this positive environment. With reasons to be bearish fading in the face of a resilient growth backdrop and falling inflation, investors are in large part overweight risk assets, such as equities and credit.
While it is important for investors to recognise a constructive environment when it comes to pass, we must also grapple with the potential risks given how far markets have come in the last few quarters. A few are top of mind: resurgent inflation, the potential for slowing growth and the ever-present shadow of unpredictable and hard-to-measure geopolitical risk. While all of these and more have the potential to derail the positive mood music in capital markets, one area of particular interest to many clients I speak with is concentration risk in equity markets. The potential for negative earnings surprises from the Magnificent 7 is a top risk to equity markets in the near term.
For multi-asset investors, being this reliant on a handful of companies is an unfamiliar and uncomfortable place to be. The benefit of multi-asset investing lies in the diversification inherent in owning a balanced portfolio of underlying securities across different asset classes, ostensibly producing an overall risk/return profile that is greater than the sum of its parts and not overly exposed to one company, risk factor, or asset class. The prevailing use of market-cap-weighted indices for portfolio benchmarks, coupled with the extreme dominance of a few large-cap technology stocks within these benchmarks, presents a significant challenge to this core tenet of diversification in a multi-asset portfolio.
Equity Market Outlook
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