HeatMap
MPS provider investment teams are asked how they expect to change their asset allocation over the next quarter.
While global tariffs pose a headwind to global growth and trade, and potentially upside risks to inflation, we think the impact could be less than many fear. Our expectations therefore remain for the global economy to grow 3-3.5% over the next couple of years and for inflation to stay reasonably close to target ranges, allowing central banks to cut rates as necessary to stimulate growth. We think this is still a supportive environment for risk assets and, given our view that valuations do not look overly demanding, our equity allocations are at the upper end of strategic ranges. Credit spreads are narrow versus history however default rates remain low and bonds still offer relatively attractive yields looking ahead, as well as potentially valuable diversification benefits. We also have allocations to alternatives, primarily equity market neutral strategies, which have been very successful in providing above cash returns with minimal correlation with traditional assets.
Markets remain volatile in 2025 as investors grapple with increasing geopolitical and political risks such as the tariff proposals from the Trump administration. Global equity markets are positive for the first half of the year, with Europe outperforming US equities. Bond indices have produced positive returns year to date. Gold has been strong while the US dollar has been weak.
We maintain a diversified approach to our models. We retain an exposure to alternatives although slightly reduced, increasing our allocation to short duration bond exposures. In the equity space, we have reduced the allocation to the US slightly, increasing our European and Emerging Market exposure. We use a currency hedged fund to mitigate the impact of US dollar weakness.
Q3 2025 has seen heightened volatility, with US trade and immigration policies creating ripple effects across markets. President Trump’s introduction of sweeping tariffs – dubbed "Liberation Day" – and subsequent policy reversals caused uncertainty, though corporate earnings remained resilient. Alongside, mass deportations have intensified labour shortages, risking inflation and complicating the Federal Reserve’s path forward. Traditionally safe assets like US government bonds and the dollar have underperformed, challenging perceptions of stability. For UK investors, a weakening dollar has amplified losses on US assets despite positive equity returns in dollar terms. Globally, markets outside the US have delivered stronger performance, reinforcing diversification as the key strategy for 2025. Meanwhile, Middle East tensions, though significant, appear to have limited market impact so far, particularly on oil prices. Amid shifting dynamics and policy unpredictability, the outlook underscores the need for flexible, diversified portfolios and a watchful eye on US fiscal developments.
To read the full Q3 outlook, visit https://blackfinch.com/market-updates/
Our AIQ investment process has called for an increase in the weighting that we hold for investors within gold, with a further purchase of a physically backed gold ETC. With developed global equity markets continuing to play a merry dance that hangs on President Trump’s every word, we welcome this slight increase in diversification away from equities. Although overall momentum within global equities remains strong, we rest a little easier in the knowledge that our holdings in this area of the market are those with lower levels of volatility and a heavy slant toward quality. Bond markets remain edgy, and we continue to favour those with durations to redemption at the shorter end.
We remain positive on equities as recession risks appear to have diminished, despite ongoing economic uncertainty. Corporate behavior remains stable, and downside risks are more limited. On duration, we hold a neutral stance: although yields have risen and valuations improved, concerns persist around US debt levels and inflation, and we expect less policy easing from the Federal Reserve than markets currently anticipate. Credit is also rated neutral this month—valuations are stretched, but fundamentals are solid, with reduced cyclical risks and subdued M&A activity.
Commodities remain neutral; we favor gold for diversification and stay negative on energy due to strong supply and potential demand weakness. Lastly, we maintain a negative view on the US dollar, favoring the euro, local EM debt, and now the Japanese yen, as investors seek diversification amid US policy unpredictability.
We see Q3 potentially offering up as much uncertainty as Q2 and H1 given the Trump’s administration of tariffs threats is resurfacing and geo political tensions and on going wars, though de-escalated somewhat, is still very much ongoing.
• Policy divergence and geopolitical risks remain dominant themes.
• Global diversification across regions and asset classes remains important for capturing opportunities.
• Stay the course
We emphasise that advisors and end clients remain invested in globally multi asset portfolios aligned to the appropriate strategic asset allocation that matches the clients’ risk appetite i.e. tolerance for loss and drawdown and to resist the temptation to time markets, switch between defensive and risk assets or pick regions, sectors or stocks, all of which have been shown to erode performance in the long term, with the consequential sub optimal outcome for the end investor.
The volatility we witnessed in equity markets early in Q2, which peaked on 9 April, has largely dissipated and returned to more ‘normal’ levels. The bulk of the early ‘easy’ gains from the April lows are now priced back into the market, though by our reckoning there is still some room for further related gains - even in those areas of the market that might reasonably be characterised as overvalued.
We are cautiously constructive on equities, speculating that elevated nominal economic growth - fueled by large government deficit spending - will, on the one hand, encourage equity indexes higher, while on the other hand, noting that significant risks remain in both the short and long term.
Meanwhile, in fixed income, we are content to hold a neutral-duration, broadly diversified position (including government bonds, investment-grade, and sub-investment-grade corporate bonds) and simply collect the coupon income.
Current positioning reflects our long-held view that the world has become more asynchronous and volatile, with increased dispersion within and across asset classes. We currently favour fixed income over equities, with a modest preference for international equity markets relative to the US. In fixed income, we maintain our bias towards government bonds, diversifying globally across the US, Europe and UK. Where possible, we also continue to blend our portfolios wisely, utilising active strategies in areas with greater alpha opportunities like emerging markets and small/mid cap equities, as well as developed and emerging market credit, while adopting a more passive approach in US equities and global government bonds. It is our belief that adopting a blended approach enables us to better capture market alpha while managing downside risk.
Markets remain volatile amid mixed signals on inflation, interest rates, and global trade tensions. While the macro backdrop is uncertain, we see opportunities emerging beneath the surface. Our current positioning reflects a cautiously optimistic outlook, favouring a diversified approach across regions and asset classes.
We maintain a balanced core of global equities and bonds, with an increasing tilt toward areas that have been overlooked in recent years. In particular, we are adding to UK and European small-cap equities, where valuations remain historically attractive and potential for long-term recovery is underappreciated. With monetary policy easing gradually and investor sentiment still subdued, we believe selective exposure to quality growth and cyclical recovery stories could reward patient investors over time.
We saw choppy waters during the first half of 2025, but in our view the tide is beginning to turn. See below a summary of our portfolio positioning:
• Preparing for a sunny horizon: fundamentally the global economy, and particularly the corporate sector, looks strong. This encourages us to hold an elevated position in global equities and high yield bonds
• Steadying the ship: given elevated policy uncertainty we are focusing on diversifying our equity holdings. We have reduced exposure to traditional US equity, and are focusing on S&P 500 equal weight, UK, Europe and Japan. We also continue to hold gold.
• Mind the debt iceberg: developed market governments are eyeing fiscal expansion, a trend that is particularly pronounced in the US. This encourages us to hold shorter dated bonds, and reduce our dollar exposure. We have also raised our Emerging Market Debt exposure.
The global economy continues to demonstrate a level of resilience to various geopolitical and fiscal concerns that have otherwise grabbed the headlines; hence, a near neutral allocation to equities and risk assets is appropriate. Aware of the pace of the recovery in equities since mid-April and current valuations, we have rebalanced portfolios recently. Understanding where tariffs are likely to level out at will be an important market consideration over the coming weeks with any meaningful move above consensus likely to lead to some weakness in equities in the short-term.
We have more in equities and less in bonds in our shorter-term tactical asset allocation. While we expect volatility from US policy and geopolitical headlines to continue, we think peak uncertainty from Trump's Liberation Day is behind us. We like the US as consumers are in good shape and corporate earnings growth remains strong. We also have more in Europe and Asia. Rising economic growth, more government spending and cuts to interest rates over the past year are positive for Europe. Asia can benefit from solid global growth and more trade if tariffs stay low. We have less in bonds as we think more government spending means long-term bond yields need to move higher to lure investors back in.
Our outlook continues to be relatively cautious, due to ongoing uncertainty concerning tariff tensions, the impact of these tensions on growth, inflation and interest rates policy along with a heightened level of geopolitical risk. Opportunities from an investment perspective will become clearer over the coming weeks and months as governments and central banks enact policy to address these challenges but currently the lack of clarity is a barrier to implement medium term investment strategies from a tactical asset allocation perspective. We have tilted mandates from a fund selection perspective to areas that we believe offer value or opportunity, with UK & European smaller companies (which are trading at historically cheap valuations) looking particularly attractive.
The global investment landscape remains uncertain, with inflation stabilizing but growth recovering slowly and labour markets softening. Monetary policy divergence and geopolitical tensions are shaping asset allocation decisions. US equities, particularly in tech, appear overvalued, with limited upside amid sustained policy tightness—leading to a continued underweight stance. Conversely, European, Asian, and select emerging markets offer more compelling opportunities. Europe benefits from low valuations, easing inflation, and supportive fiscal conditions, while Asia—especially India and Southeast Asia—enjoys strong domestic demand. Some emerging markets may also ease policy as inflation subsides. On the defensive front, long-dated UK and European sovereign bonds provide attractive yields and downside protection as rate cuts approach. To build resilience, we maintain a significant overweight in absolute return funds, using strategies like long/short and market neutral to capture uncorrelated returns. This positioning balances risk and opportunity across regions and strategies, preparing investors for the next phase of the cycle.
President Trump's fiscal policies should sustain US growth, but tariffs and rising debt fuel inflation risks. Global economies face growth slowdowns as new trade alliances form slowly to counter US tariffs. Base rates will likely remain elevated with limited cuts, and bond yields may rise further due to fiscal deficit concerns. We maintain our cautious positioning by being slightly overweight equities, underweight fixed income, and overweight absolute return alternatives. Within equities, we favour undervalued areas of the market with attractive upside potential and limited downside risks, including smaller companies and emerging markets. We see potential for higher bond yields and widening credit spreads, therefore remain underweight bonds. Our alternatives exposure continues to deliver uncorrelated returns with limited volatility and should continue to generate alpha, especially in volatile market periods.
Despite a broad-based equity rally since April the investment backdrop remains fragile, shaped by shifting economic data and persistent geopolitical tensions. Our base case is of a lower growth, higher inflation environment. Stagflation remains a tail risk, but one for which we are proportionally prepared as we continue to hold meaningful allocations to gold, infrastructure, inflation-linked bonds and REITs. Considering the uncertain sovereign deficit outlook, we maintain an overweight to alternatives and underweight to sovereigns. Within bonds we see an increased importance of being duration constrained and sheltering in the shorter dated end of the yield curve. Finally, in terms of the implications of a weaker US dollar, our overseas fixed income exposure is hedged and our gold allocation provides a natural offset to dollar weakness.
We are inclined to believe that a correction may occur in the coming months as global equity market valuations are once again elevated and not pricing in several of the key risks that we see. These include escalating tensions in Iran, the end of the tariff pause, and the passing of the US budget bill. All could have negative implications for global growth, inflation and therefore result in earnings revisions.
We remain cautious and are underweight equities for the time being. However, we are still broadly optimistic that good risk adjusted returns can be made in multi asset portfolios before year end. We will use any weakness in markets to top up our European equity allocation.
Our global multi-asset approach remains overweight in equities in aggregate, with a value style in Europe, Japan, Emerging Markets, and the UK. We are also focusing on both Growth and Value styles within the US as well as investing across the full market cap spectrum in our equity allocation. In Fixed Income, we maintain a barbell approach, balancing long-duration government debt with short-duration corporate credit to navigate varying market conditions and manage interest rate risk.
To enhance portfolio diversification and resilience, we integrate alternative assets, including infrastructure, gold, and defined return strategies, providing potential protection against volatility while capturing diverse income sources. This multi-faceted approach aims to optimise returns across different market cycles, balancing growth potential with defensive qualities.
Caution is certainly required following markets' recovery post Liberation Day, as markets prior to this were pricing in earnings growth at a level that might not be the case moving forward. While this comment applies globally, it is particularly relevant to the US market, where input prices are likely to rise and consumer spending affected by tariffs, regardless of any deals after the 90 day hiatus.
The dollar is a genuine concern. However, employing an asset allocations strategy that doesn't lean on AWCI gives us clear advantages in diversifying away the risks from high US equity exposure. With events in the middle east thrown in, a policy of remaining as globally diversified as possible certainly has merit at present.
Sold some of our UK equities exposure, taking profit from strong performance YTD. Re-allocated to global equities. Reduced our macro HF exposure in favour of Gold. Looking at potentially adding to inflation linkers given attractive real yields.
Our asset allocation is neutral the major asset classes. Government bonds are trading with the most attractive yields on offer since the GFC. We have a preference for gilts over US treasuries. The UK fiscal path is not sustainable in the long term, but the Government has remained committed to its fiscal rules, which should help alleviate near-term concerns. The Bank of England's quantitative tightening programme is scheduled for review in September, and our view is that it will be amended, providing further flexibility to the Chancellor while tightening the supply of gilts in the market. Given the Trump administration’s recent political wins, the left tail risk is that Trump may feel emboldened to play hard ball post the ‘new’ tariffs deadline of August 1st.
We maintain a modest underweight to global equities given the exogenous shocks of tariffs and fiscal budget constraints. While the US administration has rowed back on the worse of the tariff policies, they still remain considerably higher than at the start of the year, with the effects yet to show up in the hard data as companies prioritise inventory destocking. Given the recovery in markets, valuations are expensive and justify taking a more cautious stance. The same is true for corporate bonds where we remain underweight, given the tightness in credit spreads. Our overweights are towards cash and gold with the latter supported by central bank buying and its store of value at a time of fiscal largesse.
Uncertainty of US policies is negatively impacting economic growth and business investment. The path ahead for US profit growth is unclear and companies might delay crucial long-term investment spending decisions, reducing their future potential. Although markets recovered from the tariff sell-off in April, opportunities outside of the US are appearing more attractive. The rising acknowledgement that Europe and the UK needs to rebuild defensive capabilities appears to provide a path towards increased profitability. Additionally, such spending can have large multiplier effects on the wider economy. With this backdrop, we have reduced exposure to US equities and the proceeds have been equally reallocated to the UK, Europe and Emerging Markets. We retain a positive stance on Japanese equities due to corporate reforms and economic indicators.
Markets have successfully climbed their wall of worry (tariffs, wars, fiscal deficits) to stand at, or close, to all time highs. This is in sharp contrast to the start of the quarter and President Trump's 'Liberation Day' tariff announcements. Policy flips seem to be the current modus operandi, but the uncertainty and likely settlement of US tariffs well above where they started the year are not positive for capital investment decisions and growth generally. Although we are not expecting outright recession, growth looks likely to disappoint and interest rates are likely to come down, particularly in the UK. We are shorter duration in bonds and remain underweight US equity (valuations) and overweight UK, with a preference for smallcap (rates beneficiaries and less $ exposure).
Despite grappling with many different sources of uncertainty since the Trump administration took power in January, investment markets have been remarkably resilient. The exception, of course, was the aggressive sell-off in April sparked by the "Liberation Day" tariffs. That did change momentum, but not for long. The deferment of tariffs almost instantly boosted markets. Most have retraced that lost ground, and indeed, some sectors have climbed to new highs. While we still seem to be heading into a period of geopolitical turmoil, sentiment remains positive. At this time, it is important to remain diversified and allocate to risk assets only when valuations justify the risk-reward. There are attractive opportunities, especially beyond the U.S. markets, with Europe, Emerging Markets, and Japan offering more attractive valuations.
Valuations have come off the highs and decent earnings coupled with economic resilience have paved the way for returns. But risks remain, as evidenced by investor sentiment towards equities, which rose from the depths as investors leaned against the gloom in April but remains somewhat cautious.
We rebalanced to add equities against the gloom of falling markets in April, but took profits on the position and moving back to neutral at our rebalance in May. This change leaves us cautiously positioned overall as the credit view is still negative
We are mildly overweight equities where we are accentuating the allocation to European and Asian equities in particular. It is these regions where we see the most value currently. This equity position is funded by an underweight to absolute return which tends to struggle in rising markets. There are conflicting factors influencing global safe-haven bonds, but these factors largely balanced each other out at the headline level. As a result, we have a neutral weighting in bonds but an underweight position in corporate bonds and an overweight position in sovereign bonds.
We retain a small overweight in gold which has been very beneficial for low risk investors and have introduced a small allocation to silver which we think looks interesting. We have a slight overweight to cash so we have dry powder for when the market presents opportunities.
Ongoing policy uncertainty and downward revisions to this year’s earnings growth expectations prompt a note of caution in chasing the recent rally. Indeed, we anticipate markets to remain volatile, and with equities trading at above average valuations, they remain more prone to corrections around risk events.
Having reduced headline equity exposure in May, our MPS strategies are neutrally weighted to risk assets as we enter the second half of 2025. At the regional level we have also trimmed the allocation to US equities, adding to European stocks where we see specific opportunities. Elsewhere, the allocation to hedge funds was increased during the second quarter, providing appealing diversification benefits in the current environment. We have also added to the strategies’ exposure to the UK real estate investment trust (REITs) sector, with this unloved segment of the market trading at an attractive discount while offering a combination of income and, more recently, capital value growth.
For most of the past 30 years, equities and government bonds have been negatively correlated, which means that blending them in portfolios has had diversification and volatility-smoothing benefits. But over the past three years their correlation has turned positive. If this positive correlation continues, which we think likely, then what are we using to diversify our equity exposure?
First, we favour shorter duration government bond and credit funds, which continue to provide attractive income returns without significantly exposing portfolios to interest rate duration risk. They might also benefit if central banks continue to reduce short-term interest rates.
Second, we selectively employ alternative assets such as equity long/short and market neutral funds, hedge fund replication strategies, commodity holdings and infrastructure funds. Historically these alternatives have shown relatively low correlations to equity markets.
After an abrupt start to the quarter, equity markets have bounced back in V-shaped fashion. The risks of Liberation Day are far from abated, and with little progress made on trade deals to date, a theoretical deadline for “reciprocal” tariffs looms large. Should markets be more concerned? Probably. We see the biggest risk being to US companies and so we retain an underweight to the region. We’ve also removed an overweight to Government Bonds, the overall direction of Fiscal expenditure and debt issuance leads us to view current yields as being closer to a fair value than an attractive one.
We see compelling value in US Treasuries and have increased our exposure to global government bonds.
US President Donald Trump’s trade tariff announcements caused considerable concern about resurgent inflation. However, many of the country’s trade partners are now engaged in talks with Washington and this is likely to ease pressure on prices.
At the same time, the US administration is signalling a strong wish to see lower interest rates. While the US Federal Reserve is adopting a cautious approach, we believe the central bank’s tone is softening and this suggests rate cuts are likely later this year. Historically, lower interest rates tend to lead to capital appreciation for government bonds.
Meanwhile, we have reduced our exposure to corporate bonds, which we do not believe offer sufficient extra yield relative to government bonds to compensate for the additional risk.
At Binary Capital we are long-term investors, thinking in years rather than months. We typically have a growth bias in our equity positions. We are very comfortable with that. We believe some of the growth opportunities (long-term) in technology and healthcare could be under-estimated by the markets. So why would one not be positioned in such thematic areas for long-term high conviction investing. In saying this, the second half of 2025 could experience further volatility and perhaps even some drawdown pressures, which we would view as a buying opportunity.
We also continue to invest pragmatically. We are always conscious that the investment markets are the judge of our investment skills more than our abilities to intellectualise what could be going on.
Tariffs. That was the major interest in the second quarter, with Trump's announcement on April 2nd in the Rose Garden sending markets spinning. The implementation of a pause on tarffis on April 8th calmed markets and in the end, most indicies were positive. While this was one of the quickest recoveries in stock market history, it is a useful reminder to investors that time in the market is often a better course of action than trying to time the market. Rotation out of the US is likely to continue, although not as fast as some predict, and will mostly play out through a weaker USD. This is more important to foreign investors who have enjoyed a performance tailwind and need to think harder about currency exposure going forward.
The economic outlook remains mixed, with the impact of tariff uncertainty distorting data and unlikely to manifest until the second half of the year. Lower volatility equity such as structured investments, infrastructure and Min Vol factor, remain structural parts of the Aubrey MPS. At c. 50% (down from c. 55%) of the overall equity weighting, our US positioning remains underweight vs the global benchmark. UK valuations remain severely discounted, and the main portfolio activity in Q2 was to increase our UK equity weighting, as the unloved UK market should finally be turning the corner. Despite lower credit spreads, shorter dated investment grade debt continues to provide a good risk/reward profile.
As we enter Q3 2025, the global economy shows surprising resilience despite geopolitical tension, trade uncertainty and tight monetary policy. The U.S. remains a growth leader (both in the economy and in earnings), driven by strong labour markets and stabilizing inflation. Optimism is building as the potential for upcoming U.S. tax cuts and deregulation could unlock a new wave of investment and corporate growth. Trade and immigration reform discussions add further potential for structural improvement in real wage growth.
Globally, volatility persists, but fundamentals remain supportive. While debt indigestion concerns linger in a high-rate environment, opportunities exist in quality fixed income. For investors, forward-looking policy developments will shape markets as much as backward-looking economic data. Staying selective and attuned to macro shifts is key in this pivotal moment of resilience and potential U.S.-led expansion.
Markets rallied at the end of May as trade tensions eased, recovering nearly all losses from April and early May. However, confidence remains shaken, and the medium- to long-term impacts of Trump's announcements are still uncertain. Progress in tariff negotiations saw a temporary suspension of most tariffs between China and the US for 90 days, but legal challenges to Trump's tariffs increased uncertainty. This unpredictability affects companies' capital expenditure commitments and consumer confidence. Monitoring inflation and corporate earnings will be crucial. Flexibility and adaptability are essential for returns, and a diversified portfolio not overly reliant on any sector or asset class is vital. Our current portfolio construction meets these criteria, but we remain vigilant and will not be complacent.
It's been a wild ride (in headline terms) so far in 2025. Remember the LA fires in January? Or the declaration of martial law in South Korea? Probably not, because other recent events have been even more dramatic. Tariffs. Ukraine. Iran/Israel. So the fact that most global stock markets are comfortably up for the year seems, in hindsight, a little odd. But behind the headlines, there have been a lot of positive currents, which we think are likely to continue into the end of the year. European reindustrialisation has been needed for decades – and is now starting to look like a reality. Beneficiaries include utilities, industrials, and financials. The drivers of global growth are, for the first time in a LONG while, starting to exist outside of the US tech sector and the Chinese property market. Doesn't mean it will be smooth sailing (we expect more, worse headlines) but under the surface, the investment outlook is actually pretty benign.
As Q3 begins, global markets continue to navigate elevated volatility, trade tensions, and shifting monetary policy. We maintain a cautiously optimistic stance, balancing selective risk-taking with portfolio defensiveness. Within equities, we're broadening exposure across regions and company sizes, with a tilt toward undervalued areas and increased diversification beyond mega-cap U.S. names. Europe may benefit from changing global alliances and more accommodative policy. Fixed income remains a key portfolio component, offering defensive qualities amid uncertain interest rate paths and ongoing supply challenges. Maintaining defensiveness through government but mainly corporate bonds while maintaining exposure to higher-yielding areas like emerging markets.
Real assets remain a useful diversifier. With geopolitical uncertainty still elevated, we continue to believe that broad, active diversification remains the best way to navigate an increasingly fragmented global landscape. We have increased our use of hedging to offset the structural bear market in the dollar
We currently believe that there will be a slowdown in the world economy over the next 12 months and that the chance of recession has increased significantly since the beginning of the year. We therefore have maintained an overweight duration position in bonds, adding to sovereign debt as we believe it is priced accordingly.
Government debt and deficits will continue to rise, placing inflation under the spotlight, but on balance, we feel central banks will look to ease monetary conditions rather than tighten them, despite this.
There are signs that investors across the world have changed their appetite to currency hedging US assets after 'liberation day'. Some of the knee-jerk reaction is likely out of the way and a weaker dollar consensus forming, however, the lingering uncertainty over the US economy and dollar is likely to be a major theme for the rest of the year. Our portfolios are well diversified by asset class and currency, so we have weathered the environment relatively well. In bond markets, although there is now greater steepness in the yield curve, we are not seeing enough to move us away from short duration.
Our focus remains making sure our bonds do their defensive job in portfolios, whether that be during a period of higher inflation, weaker growth, or the dreaded stagflation.
Recent market dynamics have been shaped by a confluence of policy uncertainty, shifting inflation expectations, and geopolitical risk. While the global economy remains structurally sound, investor sentiment has been rattled by the unpredictability of US trade and fiscal policy, with elevated tariffs and expansive stimulus plans fuelling concerns over inflation and bond market volatility. The risk of a disorderly depreciation of the US dollar, compounded by weakening safe-haven status, adds further complexity to portfolio construction.
Meanwhile, geopolitical tensions—particularly given the US's recent actions against Iran and the potential for retaliation—have heightened global risk aversion. In this environment, regional diversification, income strategies, and exposure to real assets are increasingly critical. Europe's fiscal pivot and improving domestic demand offer a counterbalance to US-centric risks, while China's muted consumer recovery underscores the fragility of global growth. Against this backdrop, we must prioritise resilience, diversification and strategies that can weather any number of scenarios.
We are cautiously optimistic about the outlook for markets moving into the summer. While we expect there could some further policy induced volatility, economies are mostly in decent shape and are broadly being supported by central banks. We are still wary about valuations in some parts of the market, but there are plenty of other areas to look at. We remain underweight US equities and overweight UK and Emerging Market assets. Europe is slightly trickier on a tactical basis, it seems to have turned a corner on the fiscal side but could end up in the firing line again from a trade perspective and the political situation in France will be in focus at some point.
As we embark on Q3, the geopolitical landscape has become increasingly volatile. In response, we have trimmed select equity exposures in favour of commodities, particularly following the full retracement in oil prices after the temporary ceasefire between Israel and Iran. This reallocation is intended to offer downside protection should Middle East tensions resurface or if potential inflationary pressures reemerge. On the macro front, the dichotomy between US hard and soft data appears to be contracting.
While soft data has been subdued for some time, we are now seeing hard data begin to deteriorate, suggesting the economy may be losing momentum more broadly. In fixed income, we continue to favour sovereign bonds. Credit spreads remain compressed and, in our view, do not adequately compensate investors for the additional risk, especially amid an uncertain macro backdrop. Our overweight positions in China, Emerging, and Frontier Markets have been vindicated by strong recent performance. These markets have benefited from persistent US dollar weakness, a trend we expect to continue barring a significant market disruption.
We are neutral on equities, where we see risks as well as opportunities within the asset class. We have reduced exposure to US equities on (over) valuation concerns and concentration risks; the top 10 largest companies make up nearly 40% of the main US stock market. We have increased exposure to emerging markets where valuations are more attractive and the earnings outlook positive, as well as listed infrastructure, a defensive sector which has tended to perform well when interest rates have peaked.
We hold a lower risk (minimum volatility) equity strategy, in case recession risks increase. We are overweight value, which helps diversify exposure away from the largest US companies and where valuations are compelling; at these levels value has historically gone on to outperform over the next five years. Given the rise in bond yields, we believe the case for bonds is more attractive now than it has been for years. Our preference remains for high quality bonds, a reduced sensitivity to interest rates and increased exposure to inflation linked bonds, given the uncertain path ahead for inflation.
The risk of tariffs has led to a threat on growth and higher prices (inflation). We expect growth to be weaker this year due to the uncertainty, as this is having on businesses and consumers. However, we are not forecasting a recession at this point and are still constructive on risk assets. This has left us ‘neutral’ on equity allocation. From a regional perspective momentum is strong in UK and European equities, whilst the US dollar has been a headwind to US assets because of the tariff developments. In fixed income, we remain positive with attractive yields available in the shorter end of the curve in a gradually falling interest rate environment
The second quarter of 2025 has been a rollercoaster of noise when it comes to politics, conflict, interest rates and company results. The difference between the worrying media rhetoric and markets has been clear. When the fundamentals point to reasonable trading for business and supportive economic conditions, it can lead to positive outcomes for equities and fixed income. We are wary of government debt levels and issuance for the second half of 2025. The impact on the yield curve won't necessarily be the same as past cycles, which may lead to challenges to the steepening of curves in the UK and US we've experienced so far. Yet, if the normalisation of growth and inflation continues, it will remain a positive for diversified portfolios, albeit with more volatility.
We have not made any changes to our portfolios this quarter. While the past few months were marked by heightened market volatility, largely driven by renewed geopolitical tensions and tariff-related headlines, our core position remains unchanged. We continue to believe that global markets are efficiently pricing in new information and allocating capital effectively. Following a sharp pullback during the first two weeks of the quarter, markets rebounded strongly, underscoring the resilience of the underlying economic fundamentals. Our portfolios remain globally diversified, low-cost, and strategically positioned to benefit from long-term market growth. We maintain our conviction in a disciplined, evidence-based investment approach and see no reason to deviate from our current positioning.
