Key takeaways:

• Tech engine for S&P growth has slowed, and the economy is softening
• Europe’s renaissance is a huge surprise and an opportunity
• We turn positive on China, the AI story does not end with DeepSeek
• In bonds, duration looks cheap, but pick your country carefully

How have our macro and multi asset views changed since the start of the year?

Salman Ahmed: We have changed our scenario probabilities significantly since the start of this year. The US’s new tariff regime is the big shift, as uncertainty around its implementation begins to place a significant drag on both consumers and businesses. Soft data gathered through surveys on both are now weakening significantly, though hard data in the form of retail sales and durable goods orders has remained resilient. 

We are now predicting that the country either enters a cyclical recession over the next 12 months (40 per cent likelihood) or a stagflation period (50 per cent likelihood), with a small chance of a reflation scenario materialising (10 per cent). 

The situation in Europe is more positive. We are already seeing a pickup in credit growth and investor enthusiasm and the overall economic picture is better, on the back of increased spending in the defence and industrials sectors and Germany’s fiscal U-turn. The European Central Bank is in a stronger position to cut rates than the US Federal Reserve, with the spectre of inflation still lingering for the latter. Meanwhile the uncertainty about the US has not spilled over into Europe. This cycle appears to be very different from past cycles, with some significant divergence between regions. 

Similarly in China we have seen a complete shift in mindset. The government has changed its focus towards supporting consumption and away from expanding productive capacity. Our trackers have remained stable, even with an additional 20 per cent tariff. The difference this time around from 2017 is that Beijing began preparing for tariffs last September. It recognises that it must start consuming if it wants to be less dependent on the US.

What does this mean for equities?

Niamh Brodie-Machura: To start with the US, two issues have spurred the downturn in sentiment and subsequent stock market correction. First was the launch of DeepSeek’s latest model, which was built at a dramatically reduced cost relative to comparative efforts in the US, and signalled a potential shift in AI market leadership. This came against the backdrop of a strong - but not strong enough - US earnings season. The two combined to make some US companies’ lofty valuations look overstretched. 

Second was the broader macro picture that Salman has addressed, which has contributed to a decline in consumer confidence and a drop off in sentiment - something our equity analysts have observed in their conversations with company management teams. Overall you can see that the engine of S&P performance - the large technology names - has slowed at a time of wide macro instability. That means we’re looking away from growth names (or indeed “value” names, due to recession risk), and towards defensive mid-caps. 

Elsewhere, Europe has been the best surprise of 2025. There have always been very strong global leaders in Europe, and our analysts have been looking for a reason to hold them. Now, with rates falling and the fiscal taps turned on, they have reason in abundance. 

Like Salman, we’re positive on China. The change in sentiment on the ground is clear. President Xi has overtly brought tech leaders back into the fold. And the AI story doesn’t end with DeepSeek - the traditional big players like Alibaba and Tencent are also rolling out their own models. AI is likely to invigorate the market beyond the developers, by improving efficiency and performance across the economy as a whole. 

And fixed income?

Henk-Jan Rikkerink: Spreads have widened, but from a very low base, meaning they still look tight overall. Fundamentals are still reasonably strong but we’re wary of the potential growth slowdown. So we are taking a small underweight on credit overall, with a preference for high yield, and that’s primarily driven from a carry perspective. Spreads are still too narrow for us to be looking at investment grade, especially with a lot of issuance on the way. 

European spreads were previously more attractive than those in the US, but have since narrowed and that valuation advantage has vanished. Defaults in the US look relatively contained, though they are ticking up slightly in Europe.

How are you approaching tariffs in general?

Salman: It is worth placing different countries in different tariff buckets. First is Canada and Mexico. Here, we think tariff risk is likely to play out at a lower level than is being proclaimed. That’s because of the countries’ economic integration with the US. Moreover, there are more actionable objectives at play here, especially vis-à-vis Mexico, where President Trump is demanding tighter migration and drug controls.

The second bucket is Europe. Here too, tariffs are unlikely to stay as high as they are now, though they will certainly remain elevated. There is a clear economic design - Washington wants to reshore manufacturing to the US. Tariffs could well prove effective in doing that. 

The final bucket is China and its supply chain countries, where we think today’s tariffs are likely to linger. As we discussed earlier, China appears to have ample resources to shoulder that burden. 

How do you look at different asset classes and portfolio construction in this environment?

Henk-Jan: We thought we were nearing the end of the cycle at the start of the year, and were taking on risk. A lot has changed since then. From a multi-asset perspective, we are now neutral on risk, and we’re not making overarching calls on asset classes. 

We think there is better value to be found within the asset classes; taking an equity regional view, for example, and within different fixed income spaces. We’re making small tactical calls and staying very nimble. 

We’re still looking at the US, but primarily in the mid-cap space. We think duration looks cheap, though you have to pick your country well. A dovish Bank of England now makes gilts look attractive, for example. We are overweight the yen, funded by the pound and Swiss franc. 

Things are certainly complicated by the positive correlation between equities and bonds. Tactical positioning also depends on your views on recession risk. If you think we’re going into a recession, then fixed income is a nice hedge. If you don’t, then gold is one means of protection, as are equity puts. We think oil is relatively fair value right now; the upside is capped because there is enough capacity, and the downside is cushioned by strong demand. But again, perspective is key: don’t go after oil if you’re worried about a recession. We also like copper due to its value in the transition economy. 

Uncorrelated assets are always very helpful during times of volatility. Safe to say this is one of those times.