Allocation Views: Riding the US wave

Preview

The election of Donald Trump as US president promises to change the global political and economic landscape, ushering in a period of US protectionism that is set to impact most investable assets.  The new government’s prospective policies broadly support our current cross-asset positioning and our views on the evolution of markets heading into 2025, but they also increase uncertainty.

Against this background, we retain a cautiously optimistic attitude toward risk assets in this month’s Allocation Views , weighing the continued strength of US macro fundamentals against elevated valuations and a note of caution linked to recent inflation data. We hold a preference for US and Canadian equities over markets outside North America where macro conditions are weaker. Our positive attitude toward risk continues to inform a lower overall fixed income allocation, tilted toward international government bonds given the likelihood of easier monetary policy in these regions.

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 has already normalized.
• The latest data indicates firmer US inflation, illustrating the difficulty in progressing disinflation when the economy is buoyant.

Divergent policy outcomes

• Western central banks continue to cut rates, particularly in Europe where growth is weak.
• We expect a greater divergence of policy outcomes as the pace of Fed rate cuts moderates against a strengthening US economic backdrop.
• 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

• A constructive macro environment is typically associated with strong markets.
• Elevated equity valuations and tight credit spreads reflect strong fundamentals and seasonal tailwinds.
• The Trump administration’s pro-cyclical policies should be broadly positive for US growth, helping to offset risks around inflation and higher rates.

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.
• The impact of China’s stimulus measures is difficult to quantify, while we downgrade our view on emerging markets ex China given global manufacturing weakness.

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.