Duration + 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. The supply of longer-dated bonds is rising, even as demand from central banks, pensions, and life insurance funds is falling.

Meanwhile, high-quality corporate bonds are expected to perform well in this anticipated, but positive, economic environment. Carry strategies – profiting from the difference in yields between assets – are favored, 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 + 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 trend toward de-dollarization. Although gold appears expensive relative to real yields, other factors are now driving prices.

Equities outlook

Developed markets, emerging markets, and defense

Equities remain modestly positive across both developed and emerging markets (EMs), supported by slow 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 defense spending is set to rise significantly. The European Commission has unlocked €800 billion ($939 billion), or some 5% of gross domestic product (GDP), in potential spending. Meanwhile, members of the North Atlantic Treaty Organization (NATO) are moving towards defense 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 defense stocks have already performed very well, even surpassing the major US tech names over the past three years. Current valuations reflect lofty expectations, and some names score poorly on quality metrics.

We believe selectivity is key – firms with global reach, and in capability-short areas, are most promising. US defense names, which haven’t re-rated as much by comparison, may eventually benefit from unmet European demand. Nonetheless, valuations still favor European over US equities overall; however, the performance gap may narrow after recent strong gains in Europe.

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 labor in a production process – potentially mirroring trends in the US.

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, the 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 moderate 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; however, many offices continue to struggle. Industrial and defense-related real estate in Europe is expected to benefit from increased spending, with data centers becoming increasingly 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 such as transportation and energy, deal quality remains crucial. However, the capital-raising environment is strong, and financing is readily available. The structural drivers of private infrastructure investment – such as constrained public sector balance sheets, digitalization, and decarbonization trends – remain intact.

The Aberdeen House View

The following table (Table 1) provides a more detailed look at how we view the major asset classes:

Important information

Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.

Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.

Fixed income securities are subject to certain risks including, but not limited to: interest rate (changes in interest rates may cause a decline in the market value of an investment), credit (changes in the financial condition of the issuer, borrower, counterparty, or underlying collateral), prepayment (debt issuers may repay or refinance their loans or obligations earlier than anticipated), call (some bonds allow the issuer to call a bond for redemption before it matures), and extension (principal repayments may not occur as quickly as anticipated, causing the expected maturity of a security to increase).

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