Global Asset Allocation: The View From Europe

1.     Market Perspective

• While global growth remains broadly resilient, with inflation trending lower, paths forward may vary as policy impacts create divergence.
• US growth expectations are higher on the back of hopes for pro‑growth policies, while inflation remains moderately above target. European, UK and Japanese growth remain soft. Chinese policy is expected to remain supportive to bolster growth.
• The US Fed policy easing is expected to lag other central banks amid a better growth backdrop, while the European Central Bank (ECB) and the Bank of England (BoE) are likely to act faster amid economies facing weaker growth and lower inflation. The Bank of Japan (BoJ) is expected to remain on its divergent path, with incoming inflation data supporting further hikes. 
• Key risks to global markets include elevated geopolitical tensions, central bank policy missteps and uncertainty around trade policies leading to a reacceleration in inflation or hampering of growth.

2.     Portfolio Positioning

As of  30 November 2024

• We have a modest risk‑on stance through our overweight to stocks versus bonds. 
• Despite broadly elevated equity valuations, we find opportunities in a widening market—supported by easing monetary policy and resilient growth—while bonds remain vulnerable to higher rates.
• Within equities, we favour more cyclical, value‑oriented areas of the market as we expect a broadening of participation away from mega‑cap technology companies.
• We modestly overweight cash relative to bonds. Cash yields remain attractive even as the ECB embarks on easing as we expect a more gradual path.

3.     Market Themes

Here comes Santa pause

The resiliency of economic growth and rising expectations for pro‑growth policies seem to be having an impact on Fed policymakers. Chairman Jerome Powell and other Fed members’ recent comments have been notably more upbeat, highlighting the strength of the economy and labour markets, as inflation moves closer to target, calling into question how many more cuts are really needed. While we expect an additional cut this month, it seems likely they will take a ‘wait and see’ approach from here amid heightened policy uncertainty, some of which could reignite inflation. And while expectations of this easing cycle have moved dramatically up and down over the past few years given the mixed data, its unlikely to get any clearer anytime soon. So while some investors may be disappointed if they get a pause in their stocking this holiday, they may really not like what ultimately could come at the end of it—a potential hike?

Joy to the world?

As we enter the new year, consensus is even stronger that US economic and market exceptionalism will continue their dominance. US election results have fuelled that view as pro‑growth policies are expected to boost the domestic economy, while the rest of the world may face headwinds from US trade policies and a stronger dollar. This comes on top of several factors that have been holding back markets outside the US, including weaker growth, political instability, regional wars, demographics and fiscal consolidation, to name a few. But what if all that is going against these markets just happens to not be as dire next year? While it is hard to weigh the risk amid the current policy uncertainty, relative valuations are on their side, and consensus seems extremely bearish, which if things do show some signs of improvement could quickly bring some joy to world equities beyond the US for a change.

 

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