GLOBAL ECONOMY

Better than feared

Front-loading of spending ahead of tariffs and amplified AI-related capex has been a tailwind to economic growth and forecasts are being revised higher for 2025, with little payback expected in 2026 (P.14). However, this pick-up still only means a global economy that shifts from sub-trend to more trend-like growth. The juxtaposition is the weakening momentum in the labour market (P.23 and P.9), as "no fire, no hire" polices appear in place. A confident consumer remains key for many markets, as real wage growth continues to be positive, supporting household spending (P.6, P.24 and P.26). Meanwhile, the impacts of looser fiscal policy will become more evident in 2026, adding to global economic momentum (P.19).

ASSET ALLOCATION

There is no risk-free path

Assets are fully valued across the spectrum as forward price-to-earnings multiples near historic highs, credit spreads are at multi-year lows and the gold price is at a record high (P.35, P.60 and P.66). Equities can remain highly valued and spreads in credit markets tight as valuations alone are not a reason for markets to sell-off. The Goldilocks narrative of constrained inflation, a global economy that continues to rumble on, and both looser fiscal and monetary policy have beaten back the bearish views. A period of consolidation would not be unusual after such a strong run, but dips are likely to be bought, and economic and corporate fundamentals have yet to ring the alarm bell on a positive outlook for risk assets.

FIXED INCOME

A heavy barbell

Yield curves continue to steepen as markets have repriced for falling policy rates and stronger nominal growth rates (P.54). The policy outlook shapes the short end of the yield curve, while growth and inflation expectations shape the long end. Steeper curves suggest adding duration at the short end of the curve, and looking for better entry points further out if yields rise again. The position in government bonds can be barbelled with credit as the income on corporate bonds remains attractive against low defaults and still supportive earnings (P.62), or by expanding into emerging market bonds where real yields are much higher than in developed markets (P.63).

EQUITIES

Building dispersion

The narrow rally in AI-related names has been justified by the strength of their earnings in the U.S. (P.43). However, there is growing dispersion in valuations across index companies, meaning that better risk-adjusted returns may be found in a more active approach across sectors, styles and market cap. Investors will have to be mindful of the ability for companies to protect margins as tariff impacts are still building (P.44), and margin improvement has been a tech story.

The dispersion between the U.S. and the rest of the world remains wide despite strong returns from non-U.S. markets. Corporate governance changes in Japan continue to support the outlook through share buybacks (P.49), and value-up programs are becoming more evident in other Asian markets. Positive economic momentum and a weaker dollar are proving a strong tailwind to emerging market equities (P.51).