Key highlights for this quarter
GLOBAL ECONOMY
Will the Fed continue to cut rates?
U.S. Federal Reserve (Fed) officials are increasingly divided on policy outlook. The hawks see sticky inflation as a reason for holding rates (GTMA P.27), especially if consumers ultimately bear the cost of higher tariffs. The doves focus on the weaker job market, with a slowdown in hiring in recent months (GTMA P.24). Overall, the Fed is still expected to cut rates in 2026, though the pace may be slowed by stronger consumption resulting from tax rebates.
ASSET ALLOCATION
Can a stock-bond portfolio still deliver after three years of good performance?
We see the combination of the U.S. avoiding an economic hard landing and the Fed continuing to cut rates as a positive for risk assets (GTMA P.69). Rich valuations, especially in the U.S., could lead to higher volatility. Diversification and income continue to play a critical role in balancing return generation and risk management (GTMA P.80).
FIXED INCOME
Is there value in investing in fixed income given tight credit spreads?
We shall focus more on the income generation characteristics in fixed income in the new year (GTMA P.57), since room for spread tightening is limited (GTMA P.60). For government bonds, investors can also focus more on strategies that emphasize the shape of the yield curve, such as steepeners (GTMA P.62), as well as spreads between different developed markets.
EQUITIES
Is high valuation a concern?
Overall, we believe some U.S. tech stocks’ valuations are justified by long term earnings growth from artificial intelligence (AI) and broader technological adoption, but not all (GTMA P.51-53). This requires active management to screen potential winners. Valuations in APAC and Europe are less demanding (GTMA P.33), and there are plenty of companies that could benefit from global AI development. The prospects of a weaker U.S. dollar could help attract more capital into the region as well (GTMA P.38).