Multi-Asset Investments Views: Homeward bound

The US Federal Reserve (Fed) delivered its third interest rate cut in a row in December - despite the absence of much public macroeconomic data due to the US government shutdown, and questions hanging over the quality of some of the data which was subsequently published.

There was some volatility surrounding monetary policy going into 2026 (with two policymakers voting for no policy change). The Fed board consensus under Chair Jerome Powell has begun to break down. This has had a mildly negative impact on investor confidence, but President Donald Trump’s appointment of the next Fed Chair will materially shift the focus to further policy accommodation. Beyond that, the recent credible macro numbers have been supportive for further easing without raising concerns for a more marked deterioration either in the labour market or inflation. The Fed is faced with a bifurcated economy whereby lower income households and small businesses require some policy help, yet the rest of the economy is doing very well, as aggregate GDP growth and corporate earnings continue to show.

For the Eurozone, markets have begun to price the possibility of a European Central Bank (ECB) rate hike in 2026, largely due to fears the German fiscal boost, along with lagged spending for the NextGenerationEU programme (especially in Italy), will raise the neutral rate for the Eurozone as a whole.

We have marginally reduced our strong allocation to equity markets. Our quantitative signals play a foundational role in the construction of our investment views and their translation into our portfolio construction. In general, we have seen a weakening of the intensity of the positive signals that had accompanied our decision to increase risk in our equity allocation. While the intensity has clearly abated, it is only to a neutral level rather than a negative one.

The small rise in uncertainty in the US monetary policy outlook following the Fed’s December meeting was a negative factor, along with small moves in market volatility pricing. Adding some optionality into the start of the year, by receding marginally from near-maximum levels of risk appetite for our portfolios, indicates some prudence rather than any fundamental concerns. We remain significantly overweight equities.

We have maintained a keen focus on the evolution of investor sentiment and positioning indicators to appreciate the potential for new investor flows into or out of asset classes, but especially in equity markets. A common theme we have revisited this year has been the weak support from discretionary investors since the extreme moves seen in April and May. While falling levels of volatility have driven systematic investors – those who use data-led quantitative models to make decisions - to re-engage with risk, their discretionary counterparts appear to have been reluctant to engage above neutral on an aggregate basis.

More recently, retail investors proved less aggressive in countering market weakness to increase their positions. We are encouraged that the recent brief spikes in volatility have reduced systematic positions from elevated levels, while discretionary investors will likely be forced to chase the market from historically prudent levels of equity risk exposure. This means that, bar a new shock, we see space for investors to add to their equity positioning.

We remain neutral (structurally invested) on credit, as we prefer to concentrate our positive risk assessment within equity markets. Flows into the investment-grade market have again been strong in 2025, despite some concerns surrounding the increasing demand for financing from technology companies to build AI infrastructure with borrowing rather than from cash reserves. High yield has generally lagged these flows from investors, as spreads have hovered around historically tight levels. While investment-grade investors have shunned government bond markets in favour of tapping marginally higher yields in credit for their duration needs, it appears high yield investors have likely looked for better risk-reward from equity markets in their allocations.  

The combination of further policy accommodation from the Fed (and other central banks), lagged impacts from ECB easing, fiscal stimulus in the US, Eurozone, Japan and perhaps China, plus resilient corporate earnings and the rising probability of ceasefire in Ukraine, all underpin a favourable setting for the start of 2026. We wish you all the best for this new year, from health to happiness and great financial returns.