Allocation Views: Is policy priced in?

Preview

March proved to be a volatile month for equity markets, as US policy announcements eventually took a toll on investor sentiment. Optimism around growth gave way to concerns about the inflationary impact of tariffs, particularly in the United States, where extended valuations increased uncertainty.

Against this background, in this month’s Allocation Views, we assess how much of the uncertainty is priced into assets, noting that leading indicators of global growth appear to be resilient.

We conclude that our cross-asset positioning and geographic equity exposure should be neutralized as we assess inconsistent US policy. Within fixed income, we remain neutral on US duration but trim our overweight to European government bonds amid higher term premiums.

Macro themes

Growth remains positive, for now

• Leading economic indicators suggest positive global growth
• Growth reflects ongoing strength in the services sector, while manufacturing activity has also begun to improve
• US trade tariffs are a headwind to global growth as policy uncertainty discourages investment and limits animal spirits

Uncertain inflation outlook

• Significant progress has been made, although it has been bumpy, and inflation is still above targeted levels
• Tariffs have raised short-term inflation expectations, but are more likely to cause a one-off rise in prices rather than have a sustained impact
• Elevated services inflation is normalizing gradually alongside labor market strength, but core goods inflation has firmed amid tariff concerns

Divergent policy outcomes

• We expect a greater divergence of policy outcomes as the Federal Reserve (Fed) recalibrates its interest-rate strategy against a changing US economic backdrop
• Other Western central banks are set to cut rates more quickly, particularly in Europe, where growth remains subdued despite fiscal stimulus
• In major economies such as the United States, Germany and China, fiscal policy is emerging as an influential driver of asset prices

Portfolio positioning themes

Resetting expectations

• Equity positioning and sentiment has weakened materially, creating a more constructive setup moving forward
• However, inconsistent US policy threatens to amplify uncertainty, dampen growth and fuel inflation
• Against this background, we used the recent 90-day pause in reciprocal tariffs announced by President Trump to neutralize our “risk-on” positioning, selling into strength as markets rallied

Equities: Leveling up

• We take a more balanced view of the United States amid heightened uncertainty, despite resilient earnings growth
• Recent US policy has altered the global investment landscape, improving the broad appeal of international equities relative to US stocks
• We neutralize our emerging markets ex China position, influenced by fading US exceptionalism and a weaker US dollar

Convergent bond yields

• We favor global fixed income, remaining slightly long eurozone duration while we monitor the impact of fiscal stimulus on inflation and growth
• Market expectations around the depth and duration of policy cycles have increased significantly
• Financial conditions have weakened and now provide more attractive pricing for corporate bonds, like high yield issues