Well-diversified portfolios are essential to protect against both the risk that inflation resurges and pushes bond yields much higher, as well as the risk that the economy falls into recession.
Our macro base case over the next 12 to 18 months sees the global economy slowing as US tariffs and policy uncertainty weigh on activity domestically and abroad.
There is, however, a high degree of uncertainty about the impact of US policy and how other countries will respond. Well-diversified portfolios are therefore essential to protect against both the risk that inflation resurges and pushes bond yields much higher, as well as the risk that the economy falls into recession.
Macro: US tariffs and policy uncertainty weigh on the global economy. A slowdown is more pronounced in the US than other regions. In Europe, considerable fiscal support and lower rates support domestic demand, countering external headwinds. In China, growth remains sluggish as tensions remain elevated with the US and access to other export markets is restricted.
Markets: Regional equity diversification and income strategies are essential. European equities outperform US equities. Core bonds trade within recent ranges, with UK Gilts outperforming. The US dollar declines in an orderly fashion against a broad basket of currencies.
Macro: Tariff policy causes a meaningful re-acceleration in US inflation as elevated household inflation expectations lead to an entrenchment of price pressures. Tax cuts and immigration curbs worsen the inflation problem. Despite growth weakness, sticky inflation prevents central banks from easing policy.
Markets: A negative environment for stocks, with interest-rate sensitive sectors hit hardest. Rising yields on core fixed income lead to losses as stock-bond correlations remain positive. Real assets and selected commodities act as a crucial inflation hedge.
Macro: The US economy rolls over as businesses – feeling pessimistic about the outlook – switch from not hiring workers to actively firing them, triggering a vicious economic cycle. US weakness acts as a drag on activity in other regions, with fiscal and monetary support unable to offset external headwinds. Elevated geopolitical tensions exacerbate growth weakness.
Markets: The negative stock-bond correlation returns. Equities are hit by substantial earnings downgrades, but this environment is very positive for high quality fixed income, with significant capital upside as central banks cut rates by much more than markets were pricing.
Macro: Growth accelerates driven by big fiscal stimulus and an artificial intelligence-induced productivity boom. Trade tensions ease as new trade deals are struck and geopolitical tensions calm. Rising productivity keeps inflation in check despite a tight labour market and fiscal stimulus, allowing central banks to gradually cut interest rates back towards neutral despite still solid growth.
Markets: A very positive environment for stocks globally, particularly in emerging markets. Fixed income also sees strong returns as interest rates move lower and credit spreads tighten to new record levels.