Key takeaways:

• There are no signs of imminent recession in the US, and we are looking to take on more equity risk
• But there is value in diversifying out of the US, in particular towards underappreciated parts of Europe
• Credit is attractive, with spreads tightening to historic levels. Asian HY in particular presents good opportunities
• Likewise there are strong alternative currencies to find defensive characteristics as the dollar continues to depreciate

What is your macro outlook for the remainder of the year?

Salman Ahmed, Global Head of Macro and Strategic Asset Allocation: We are seeing no signs of a significant downturn in the coming months. Our macro indicators pointed to a sharp fall in activity in April, following US President Donald Trump’s “Liberation Day” tariff announcements, but things have bounced back since then. This is true both in the US and the rest of the world. Nevertheless, policymakers in the US are focusing increasingly on the labour market (and less on inflation), and it was this that informed their decision to cut interest rates by 25 basis points in September. 

Over the longer term, we expect the US Federal Reserve to maintain this dovish trend in monetary policy. This may result in some form of yield curve control (YCC) - arguably, the Fed has already set off down this path by means of its debt issuance structures. The central bank is focusing on the short end of the curve, and it looks very likely that next year’s new Fed chair will continue to be dovish on rates. That is likely to contribute to a multi-year downward trend in the dollar. 

What does dollar depreciation mean for other currencies?

Lei Zhu, Head of Asia Fixed Income: The dollar depreciated hardest in the second quarter, around Liberation Day. Since then, it has been broadly flat. Some high-quality currencies, issued by countries with a trade surplus over the US, have continued to appreciate against it (while reducing their own exposure to the dollar and moving further into their own currencies). Other lower-quality currencies have depreciated. So this isn’t a broad-based rally anymore. We seek opportunities in those appreciating currencies which offer some of the defensive characteristics once represented by the dollar. 

And what about tariffs and their impact on inflation?

SA: The impact from tariffs so far has been mild, but it will come. There are signs already that some inflationary components are starting to tick up. We anticipate tariffs settling at around 19 per cent on average, which will contribute to a structural rewiring in terms of supply chains and corporate behaviour. This shock will build up in the system over time. We have been saying since 2022 that the realistic inflation target (for the Fed) now is 3 per cent, and not 2 per cent as before. 

One further complication is the reliability of US data, especially as questions around Fed independence intensify. We will be looking at plenty of alternative inflation data to sense check what is reported.

We think the tariff regime and other US policy moves will usher in a period of global fragmentation. The US has retreated somewhat from the full-scale isolationism it pursued at the start of the year after it saw the impact was too great to bear. Yet it is still set on isolating China and creating new regional blocs, formed around military, trade, and such other lines. 

What does this mean for the US equity market, which has had a strange year so far?

Ilga Haubelt, Head of Equities: Equities have, broadly speaking, held up well despite tariff turbulence. Two things have supported them. First, the market has chosen to take a glass-half-full perspective and brushed off the first round of tariffs. Second has been the AI rally, which has supported Big Tech stocks in the US. That has broadened out - Europe, for instance, has been buoyed by more fiscal support in Germany, while the Deepseek moment supported Chinese growth. I think this momentum can run as long as earnings deliver. They look likely to do so for the foreseeable future.

At the same time, the US has actually underperformed relative to other big global markets. The worst period was of course around Liberation Day. But since then we have seen its exceptionalism tested, and it has proved robust. I certainly wouldn’t be betting against the US, for all the reasons that have long applied - its capacity for innovation, cheap energy, the prospect of deregulation, and so on. 

Liberation Day nevertheless prompted a broadening of investors’ geographical exposure. That’s no bad thing, as other regions perform well and allocators question their previous overreliance on the US.

Are investors thinking about different sizes of companies as well?

IH: Investors have certainly begun looking further afield from the large caps that dominate the S&P 500, towards the mid and small caps. The latter are generally more highly leveraged than the cash-rich tech giants, and many will have to refinance at the start of next year. Yet they also are buoyed by tailwinds. Deregulation there will benefit smaller companies most of all. And there is huge potential here - 82 per cent of the US workforce works for small and mid caps. 

Elsewhere, we are very positive on mid caps in Europe, in particular the German Mittelstand. A lot of these companies are poised to benefit from the country’s renewed growth agenda. 

Henk-Jan Rikkerink, Global Head of Multi Asset, Real Estate and Systematic: It’s worth noting too that the Mittelstand has historically been correlated to the industrial sector, which is now on its way out of a recession. 

Is there still value in AI?

IH: A group of Fidelity equity analysts recently returned from a trip to Silicon Valley. They reported plenty of optimism on the ground, but they also had concerns. Spend on AI is enormous, yet adoption is lagging. Companies have struggled to adjust their processes, meaning that while there are some well-known consumer applications now in practice (for instance, in call centres), corporate adoption is slow. Our approach to the AI trend is to look for the underappreciated opportunities. We like software companies that have a sticky consumer base that can easily monetise AI functions, or industrial companies that provide the equipment for data centres, for instance.

How is credit holding up?

LZ: The credit market has performed well through all this. Spreads in investment grade (IG) and high yield (HY) have continued to tighten to historic levels. Yet we still see opportunities in the very high quality segment of IG, in particular in medium-term bonds, especially as investors look for diversified options away from US Treasuries. That demand grows even as supply from corporates stays low. 

There have also been plenty of sovereign re-ratings in recent months which present good opportunities. So in Europe, France has been downgraded while Portugal upgraded. Asia high yield in particular is delivering very well as spreads have tightened sharply, while countries like India and Pakistan have been upgraded.  

What is the outlook for China?

LZ: There has been a degree of stabilisation in the property market. Yet it has not stabilised enough to restore consumer confidence, which is also suffering from a high unemployment rate. We are four years into the real estate restructuring, which means there could be another one or two years of bottoming out to go. The People’s Bank of China does have room for further monetary easing since real rates remain quite high. So while there are signs of stabilisation in the economy, we can’t anticipate a full rebound in consumption until the property sector fully recovers.

How do you interpret all this from a strategic asset allocation perspective?

HJR: We had been neutral on risk until recently, but now we are risk-on for equities. That reflects a lot of what we’ve heard today. Growth in the US has been better than we expected, and peak inflation seems to be behind us (and a little bit of inflation is good for nominal growth and for equities). Earnings momentum is still positive. The slashing of rates across the world is also good news for stocks. And we like opportunities outside the US too, particularly in emerging markets. 

And private assets?

HJR: Fund raising for private assets has been low recently. Where cash has been raised, it has gone into mega funds. Yet we know there is plenty of dry powder waiting on the sidelines, ready to be spent. Investors in private markets are becoming more selective now. So we have to be more selective in opportunities we identify too. Parts of private credit and direct lending in the US are being commoditised; secondaries there are booming. We prefer buy-and-build strategies in the mid-cap space in private equity, and we see some promising special situations in Europe.

The theme here is that the past two decades in which every private asset went up, are over. Investors must be more selective now.