Duration and credit – where we see value

In this context, we are positive on duration, particularly global government bonds. An expected US slowdown, limited inflation effects from tariffs and a more dovish incoming Federal Reserve (Fed) head, all suggest that shorter-tenor bond yields underprice the number of future interest-rate cuts by the Fed. 

However, we think that long-end yields will remain under pressure. The fiscal expansion due to the US Budget Reconciliation bill could push the US budget deficit above 7%. Across developed markets, debt levels are high. Longer-dated bond supply is rising, even amid falling demand from central banks, pensions and life insurance funds.

Meanwhile, high-quality corporate bonds should perform well in this anticipated ‘slowing-but-positive’ economic environment. Carry strategies – profiting from the difference in yields between assets – are favoured, and credit yields are attractive. However, tight spreads – the additional yield corporate bonds pay compared to similar ‘risk-free’ government bonds – temper our conviction.

Currency and commodities – dollar weakness and gold

We have turned structurally negative on the dollar. The shift away from relatively strong US growth is likely to continue – prompting outflows from dollar assets. Despite an 8% depreciation so far this year, the dollar remains expensive on many valuation metrics.

Gold may serve as a useful diversifier amid rising geopolitical risks and a weakening dollar. Central banks are increasing their gold reserves as part of a broader ‘de-dollarisation’ trend. Although gold appears expensive relative to real yields, other factors are now driving prices.

Equities outlook – DM, EM and defence

Equities remain a modest positive across both developed and emerging markets, supported by slowing-but-positive-growth and ongoing interest-rate cuts. However, our conviction is limited following the recent rally and negative earnings revisions, particularly in developed markets.

European defence spending is set to rise significantly. The European Commission has unlocked €800 billion (US$939 billion), or some 5% of gross domestic product (GDP), in potential spending. Meanwhile, North Atlantic Treaty Organization (NATO) members are moving towards defence spending that will reach 5% of GDP. 

While the growth multipliers – the ratio of the total increase in economic output to an initial increase in spending – are low, this spending will support European economies.

That said, European defence stocks have already done very well, even surpassing the big US tech names over the past three years. Current valuations reflect lofty expectations and some names score poorly on quality metrics. 

Selectivity is key – firms with global reach, and in capability-short areas, are most promising. US defence names – which haven’t re-rated as much by comparison – may eventually benefit from unmet European demand. 

Nonetheless, valuations still favour European over US equities overall, but the performance gap may narrow after recent strong gains in Europe. 

Emerging market (EM) equities remain attractively valued, amid positive earnings revisions. More artificial intelligence (AI) ‘winners’ may emerge from China, where technology firms are increasing capital intensity – the amount of capital used per unit of labour in a production process – potentially mirroring US trends.

Chinese economic growth is expected to slow, with inflation staying low. Tariff pressures will compound challenges from real estate deleveraging and weak consumer confidence. However, policy is likely to remain accommodative.

We also expect broader EM growth to cool slightly. Inflation has eased across many EMs and should continue to moderate, aided by US tariff policy and the re-routing of Chinese exports toward Asia. This supports our positive stance on EM debt, where moderating inflation, scope for further rate cuts and a weaker dollar are all tailwinds.

Private markets – infrastructure strength, credit caution

In private markets, we are modestly positive on global direct real estate. After a deep post-pandemic downturn, the cycle is turning, albeit gradually. Rental growth is healthy and vacancy rates are low, although many offices still struggle. Industrial and defence-related real estate in Europe should benefit from increased spending and data centres are becoming more prominent in industry benchmarks.

We’ve downgraded private credit to neutral. While returns remain attractive in infrastructure debt and fund finance, our concerns are growing around private corporate and commercial real estate debt. Risks include a potential default cycle, increased competition from banks and the relatively untested nature of the private credit cycle.

Finally, we have upgraded our positive stance on infrastructure. While tariffs and energy market volatility pose challenges – especially for GDP-linked subsectors like transport and energy – deal quality remains crucial. But the capital raising environment is strong and financing is abundant. The structural drivers of private infrastructure investment – such as constrained public sector balance sheets, digitalisation and decarbonisation trends – remain intact.

For more details on the latest House View see below: