Investment Institute
Asset Class

Multi-Asset Investments Views: Take me higher

KEY POINTS

Significantly overweight equities
We have further increased our overweight equity allocation, as all our quantitative signals are now green, and investor positioning is catching up with the strength of this bull market. Positioning is no longer as depressed as a couple of months ago. With US retail investors and systematic strategies having rebuilt risk exposure there’s still room for further growth unless we see a sudden shock or volatility spike. Aside from a weakening job market that prompted the Fed to lower interest rates, US macroeconomic surprises have remained positive for over two months, and business surveys have also rebounded
Looking for diversification within equities
We have diversified our tactical overweight in equities across regions, to move further away from the historically extreme concentration in equity indexes. We particularly favour European stocks, especially financials, and Chinese equities. We have closed our relative value trade in German mid-caps relative to France, as we believe the September bout of idiosyncratic political instability and France’s credit rating downgrade have been absorbed in prices and positioning
Holding on to short-dated German bonds
Mindful of the global yield curve steepening - in part driven by large public deficits in the US and several European nations and by sticky inflation - we maintain our preference for short-dated German bonds, although we were surprised by the recent hawkishness in the ECB President Christine Lagarde’s tone. The forward market pricing is now consistent with only one Eurozone interest rate cut over the next 12 months, which leaves limited upside for monetary policy and therefore offers some potentially favourable asymmetry.

Markets successfully navigated both macroeconomic and geopolitical hurdles this summer and we believe they have the potential to continue to push higher. The ongoing absence of any renewed bouts of angst, and hence a pull-back in prices or risk appetite, is unusual, with more than 100 days without a retracement of 2% on the S&P 500. We believe the explanation lies in discretionary investor positioning: while systematic strategies are generally aggressively positioned relative to history, the discretionary part of the professional market lightened up on risk going into the summer. That has left a balance of demand, with investors fearing they would miss out on the ongoing rally, which in turn has driven it to the current self-fulfilling outcome.

Given the combination of Federal Reserve (Fed) projections indicating rate cuts into year-end, buoyant US activity and hopes for renewed stimulus in China, we believe the rally can extend further. We continue to hold a significant overweight in equities.


The Fed’s September meeting was a masterclass in both expectation management and integrity reassurance. Despite continued pressure from the US administration via both the media and the courts, Fed Chair Jerome Powell delivered the cuts the market had priced in since the dramatic downside revisions to jobs data. Yet, on the other hand, the most vocal doves – other than newly appointed Governor Stephen Miran - sided with Powell and voted for a 25-basis-point cut rather than dissenting in favour of a greater reduction. This comforted those investors who had begun to question the integrity of the Fed’s independence.

While inflation remains sticky at around 3% and growth buoyant, with the latest GDP growth figures at more than 3% (annualised), delivering both parts of the Fed’s dual mandate of inflation and unemployment will remain challenging. US dollar weakness has persisted, due largely to the reduction of the interest rate gap, especially with Europe. However, we continue to be mindful of any further attacks on the Fed’s independence and focus on the US Supreme Court decision on Fed Governor Lisa Cook’s attempted dismissal. We remain sellers of US dollars (with a $1.20-to-€1 target) and absent from US duration, cautious of potential further curve steepening.

Our equity risk appetite is essentially focused on the case for greater US equity performance, driven by the enormous level of infrastructure investment to accommodate the artificial intelligence boom (see chart below). Still, we remain eager to broaden our risk to other geographical areas and/or sectors. We see potential in the recent strong rally in Chinese equity markets, driven by the expectation of another round of stimulus following poor macroeconomic data. Domestic retail investors are also providing increasingly important inflows. Where appropriate, our preference is for China technology stocks, which benefit from strong earnings growth and a large valuation advantage compared to their US peers.

Capex estimates for hyperscalers are growing fast and outpace the rest of the market
Source: Bloomberg, HSBC. Hyperscalers include Amazon, Microsoft, Oracle, Apple, IBM, Alphabet, and Meta. For IBM, 2029 and 2030 capex estimates are as of 1 February 2025 and for Oracle, 2030 capex estimate is as of 5 February 2025

Meanwhile, the tone adopted by European Central Bank President Christine Lagarde has once again veered to the hawkish side, leaving investors now pricing less than one further interest rate cut. We find this stoicism somewhat misplaced and cannot square that circle. Germany - the Eurozone’s largest economy - has been going through two years of near recession, while France – the bloc’s second-largest - is sluggish, though there is better growth in Southern Europe. We believe a rate cut can be priced back in, with deflationary forces still weighing on the region through the strong currency, weak energy prices and large-scale redirecting of Chinese exports from the US to Europe. With such asymmetry, we hold on to our long position in short-dated German bonds.

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