Stepping into the final quarter of the year, we have recalibrated our asset allocation to reflect shifting global dynamics and evolving policy signals. One of the key changes we have made is to increase exposure to onshore Chinese equities, where selective growth opportunities are emerging. In fixed income, we further reduced exposure to the European yield curve, while increasing our allocation to US investment grade credit. At the same time, we have added US dollar hedges, believing we might still see additional pressure on the greenback. Together, these adjustments underscore our balanced approach aimed at capturing regional growth prospects while maintaining prudent risk management.
Macroeconomic Outlook
The US
While current economic momentum remains solid – Q2 GDP was revised up to 3.3% on the back of strong investment – the outlook for consumption, which drives two-thirds of growth, is becoming more fragile. Retailers are noting greater price sensitivity and, in the months to come, a softening labour market combined with higher prices could weigh on demand. Acknowledging growing risks to the “balanced” labour market, the Fed has signalled readiness to cut rates in September, with the path of further easing dependent on a) job market dynamics and b) how tariffs filter through to inflation.
Early signs already point to renewed price pressures. Producer prices and PMIs both suggest inflation pressures are already present, if not yet passed fully to consumer. This is partly because many retailers built inventories ahead of the levies, as well as the fact that tariffs announced in late July do not apply to goods already ordered and scheduled to arrive before October 5. Commentary also suggests businesses are cautious about price hikes, and they could opt to absorb some of the costs through their margins in order to defend market share. After all, consumers do not have the same savings buffers that cushioned them during the last inflationary wave. Against this backdrop, any inflation flare-up may prove more transitory than in the past.
On the corporate side, the Composite PMI rose to 55.4 in August, signalling a strong acceleration in private sector activity. Business investment in the AI and Tech sectors remains a bright spot; 2026 capex forecasts for the major players have surged 29% to USD 461 billion, a figure that rivals the GDP of entire nations. This is set to create positive spillovers across adjacent industries.
Eurozone
The Eurozone economy has shown resilience, with manufacturing activity returning to expansion for the first time in three years (PMI at 50.5), supported by stronger domestic orders, even if external demand continues to weaken. A 15% US trade tariff avoided the worst-case scenario of an escalating trade war, and the added clarity appears to have lifted business sentiment. On the household side, rising real wages and a firm labour market are encouraging consumers to gradually loosen their purse strings, putting a floor under growth, though no consumer boom is expected.
With recession fears fading, markets have scaled back expectations for an ECB rate cut this year. One cut before its March meeting is seen as a coin toss. Still, the region lacks a clear catalyst for a more convincing upturn. Defence spending is often cited as a potential growth driver, but its impact will depend on whether expenditures shift meaningfully towards domestic R&D and production. Currently, the bulk of EU defence budgets flow abroad: of the EUR 75 billion spent between June 2022 and June 2023, nearly 73% went to non-EU suppliers[1] with the US being the primary recipient. Until procurement patterns change, defence outlays are unlikely to translate into significant regional growth multipliers.
Given the above, we see Europe delivering stability but limited upside relative to other major regions.
China
The recent Shanghai Cooperation Organisation summit, attended by leaders representing roughly half of the world’s population, highlighted a shifting geopolitical balance, with American protectionism accelerating Eurasian integration, with China at its core.
China’s economy has outpaced expectations this year, supported by front-loaded exports to the US and targeted government stimulus. More recently, the drag from the property sector has begun to ease, and household consumption has been steady, with retail sales posting positive year-on-year growth each month this year. A full recovery, however, still hinges on a clear bottoming out in housing.
A further extension of the US-Sino trade negotiation deadline to 10 November could provide near-term support, as American retailers replenish inventories ahead of the holiday season. While trade tensions remain a key risk, to keep in mind is the fact that only around 3% of the gross value added originating in China ultimately flows to the US.
The economic trajectory will depend primarily on Beijing’s policy stance which, for the time being, remains proactive but measured, ushering the economy towards the self-imposed 5% growth target.
Investment Decisions
In our global allocation, we have a marginal preference for equities, focusing on the US and select emerging markets, while maintaining underweight positions to Europe and Japan.
At our latest Committee, we increased exposure to onshore Chinese equities (EUR- hedged), compelled by ongoing policy support and stabilising sentiment. This year’s rally has mainly been driven by domestic institutional players, but with earnings yields on equities exceeding those on bonds, households are starting to turn to the stock market. It is estimated that Chinese households are sitting on some USD 22 trillion, including USD 7 trillion in “excess” savings. Notably, A shares have proven more resilient to tariff headlines, as demonstrated after the April “liberation day” announcements. Innovation in AI and domestic semiconductor development (with a growing trend towards hardware-software co-design) could also infuse the market with fresh energy.
In terms of sector preferences, we downgraded US consumer discretionary from neutral to negative. Consumer sentiment has been weakening as of late, with perceptions of job availability declining for eight consecutive months. Households will bear some of the brunt of tariffs, but unlike in the post-pandemic period, there is no fiscal support offsetting higher prices. This could translate to margin pressure, and indeed, corporate commentary is underscores rising price sensitivity. Walmart has observed volume declines in discretionary categories where prices rose, while Target highlights growing consumer focus on value.
In the fixed income space, we further reduced European government debt exposure. While the short end of the curve should remain anchored with the ECB largely on hold, several factors could pressure the long-end higher: Germany’s fiscal pivot, France’s widening deficit combined with political uncertainty, and the Netherlands’ preparation for a complex EUR 2 trillion pension reform taking effect in January.
The proceeds have been redeployed to increase exposure to US investment grade (IG) credit. Should the Fed move ahead with rate cuts, the short end of the US curve has scope to decline, though upwards pressure on the long end remains possible given fiscal dynamics., making the intermediate segment of the US curve look most compelling. The carry on offer is more attractive than that of EUR equivalents while credit technicals remain strong with significant inflows and limited primary issuance.
Emerging market debt remains an area of opportunity. Hard currency EM bonds offer an attractive combination of high carry and low volatility. While spreads are tight, the carry on offer keeps the asset class palatable. Note that we see greater resilience in sovereigns than in corporates given ongoing trade uncertainty.
We also retain selective exposure to European high yield (HY). Despite limited room for further spread compression, the asset class offers eye-catching yields and upbeat sentiment as recession fears fade. HY bonds’ relatively short duration (below three), has kept volatility low, while the default cycle may have peaked. Together, these features could position European HY as an interesting complimentary allocation for investors with higher risk tolerance.
For risk management, we have increased currency hedging on a portion of our US equity exposure. While the US economy remains resilient, growing strain on consumers, the hit from tariffs and general political uncertainty could present headwinds in the coming months. On the policy side, Fed intervention may cushion growth but could simultaneously weaken the dollar.
Conclusion
In sum, our September allocation reflects a preference for equities over bonds, with a deliberate tilt towards regions and sectors offering stronger cyclical or structural growth potential. We are glancing east with greater conviction, while remaining disciplined in managing risks through selective credit exposure and currency hedges. The result is balanced positioning: leaning into opportunities, especially those backed by policy support, while keeping portfolios resilient in the face of fiscal and macro uncertainty.
[1] According to the European Economic and Social Committee
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