Global Asset Allocation: The View From Europe

Outlook: New World Order

• We are generally cautious as broadly resilient global growth and receding inflation trends could be at risk to increased policy uncertainty, particularly with the potential for escalating trade wars. 
• US growth is showing some signs of softening, while sentiment toward Europe, the UK and China is improving on fiscal spending hopes, despite tariff threats. Other more directly impacted economies, notably Mexico and Canada, are at higher risk.
• With monetary policy remaining broadly accommodative, disruptive trade policies could force more decisive action by central banks to support growth with the impacts on inflation uncertain. 
• Key risks to global markets include the escalating trade wars’ impact on growth and reaccelerating inflation, central bank missteps, and geopolitical tensions.

Themes Driving Positioning

Dethroned

It has been a surprising start to the year with US markets’ reign being challenged after two strong years of outperforming on uplifted sentiment toward Europe and China. Optimism for a resolution in the Russia‑Ukraine war, the European Central Bank (ECB) easing, talk of increased defense spending and hopes for less punitive tariffs have helped improve sentiment across Europe. Meanwhile, Chinese markets accelerated, led by depressed tech names, following news out on DeepSeek, an artificial intelligence start‑up company whose technology called into question US dominance in the space. And while long‑term structural issues linger and tariffs could pose downside risk to these markets, valuations remain compelling versus those in the US, particularly amid narrowing growth differentials. Against this backdrop, we are tilting our regional exposure to markets outside the US.

A means to an end?

Following the post‑election ‘Trump Bump’ where markets seemed to focus on potential impacts of pro‑growth policies, including deregulation and lower taxes, things have quickly shifted as the focus has turned to trade and geopolitical policies. The on‑and‑off tariff threats have upended markets trying to weigh the impacts on growth and inflation. Geopolitical tensions surrounding the Russia‑Ukraine war have also caused upheaval across Europe as they recalibrate US support in the region. This comes at a fragile time when inflation was just coming into control and growth was still holding up. Recent data, however, show growing concerns and softening economic data in the US, largely attributable to increased uncertainty around policy. Intended or not, prolonged uncertainty will begin to have real impacts on policymaker, corporate and consumer behavior, leaving us more cautious near term and watching for opportunities amid expected higher volatility.

 

For a region-by-region overview, see the full report (PDF).