Allocation Views: Navigating economic divergence

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US exceptionalism remains our dominant global investment theme moving into 2025, driven by the promise of pro-growth policies from the new Trump administration. A divergence in economic strength was already evident prior to the election results, but it will become more apparent, in our view, as the new US government adopts protectionist rhetoric and implements policies designed to bolster the US economy at the expense of trading partners.

Against this background, we hold a preference for US stocks in this month’s Allocation Views, while an uncertain outlook for international markets curtails our overall risk appetite and prevents us from taking an outright bullish approach to equities on a cross-asset level. Within fixed income, we continue to prefer international bonds amid a weaker macro environment outside the United States, despite the recent uptick in US Treasury yields.

Macro themes driving our views

Growth remains constructive

• Leading economic indicators suggest positive global growth
• Growth reflects ongoing strength in the services sector, but manufacturing remains sluggish
• Global growth patterns are diverging as current and forward-looking data highlights strength in North America, with Europe and Asia lagging somewhat

Inflation risks are balanced

• Significant progress has been made, although it has been bumpy, and inflation is still above targeted levels
• Elevated services inflation is normalizing gradually alongside labor market strength, whereas core goods inflation is normalizing at a faster pace
• The latest data indicate firmer US inflation, illustrating the difficulty in progressing disinflation when the economy is buoyant

Divergent policy outcomes

• We expect a greater divergence of policy outcomes as the Federal Reserve cuts interest rates at a measured pace against a strengthening US economic backdrop
• Other Western central banks are set to cut rates more quickly, particularly in Europe, where growth is weak
• Fiscal policy in major economies such as the United States, Germany and China is emerging as an influential driver of asset prices

Portfolio positioning themes

Growth supports risk assets

• The macro environment is constructive, broadly supporting strong markets
• Global corporate fundamentals appear robust, as earnings continue to strengthen against the healthy macro backdrop
• Elevated equity valuations, tight credit spreads and fiscal policy uncertainty represent risks to global growth

A changing equity landscape

• Stronger earnings growth in the United States influences our enhanced outlook for US equities
• A weaker macro environment diminishes the broad appeal of international equities relative to US stocks amid slowing price momentum
• We downgrade our view on emerging markets ex China, given global manufacturing weakness, a strong US dollar and the potential negative impact of US fiscal policy

More attractive yields for bonds

• Higher yields enhance the return potential from global fixed income, supporting our neutral duration positioning and our relative preference for international bonds
• Market expectations around the depth and duration of some policy-easing cycles have retraced to more appropriate levels
• Relatively healthy financial conditions support optimism toward high-yield corporate bonds, which we prefer over investment-grade issues