We remain underweight most developed market stocks as US tariff policy is still unclear but are more enthusiastic about emerging market assets.
Asset allocation: when uncertainty lingers, caution prevails
For a short while during May, President Trump distracted the markets from his rolling tariff announcements with his Big Beautiful Bill tax and spending bill. Unfortunately, his latest policy will do little to alleviate long-term economic uncertainty. Quite the opposite. For one thing, the fiscal plan will keep the US deficit running at around an annual 6.5%, which means the US government’s debt burden will continue to climb. Stagflation also remains a risk – consensus US GDP estimates have been coming down sharply during the past few months, while forecasts for inflation remain well above the US Federal Reserve’s target.
As a result, we maintain our underweight position in equities. Corporate earnings are continuing to weaken in developing economies, while there is considerable uncertainty about when they might start to pick back up again.
Equally concerning, economic weakness comes hand in hand with inflation that is persistently above central bank targets, which stops us from taking a bullish stance on bonds, especially given that the Fed is finding it hard to justify pre-emptive rate cuts. We also remain overweight cash.
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