On this page
Strategic positioning (long-term allocation)
Within our long-term asset allocation, we have made a targeted adjustment in fixed income. Our overall exposure to equities, as well as the regional allocation within equities, remains unchanged. However, we have reduced our allocation to investment grade corporate bonds and increased our allocation to government bonds.
This change reflects our view that investment grade corporate bond valuations are currently less attractive. Credit spreads — the additional return investors receive for taking on corporate risk over government bonds — remain close to historically tight levels. As a result, investors are receiving less compensation for the additional default risk associated with corporate bonds than has typically been the case in the past.
In contrast, we see better value in government bonds at current levels. As part of this change, we have introduced an allocation to Japanese government bonds. These bonds now offer higher yields than in recent years, alongside diversification benefits.
Tactical positioning (shorter-term views)
We have reduced our overweight to equities from +2.75% to +2% on average, taking some profits following strong market performance since the previous rebalance. We are still positive on equities given resilient economic growth and broadly supportive earnings.
We continue to see artificial intelligence (AI) as an important long-term growth driver, with companies in this area reporting strong results and attracting significant investment. However, we are mindful that a relatively small number of large companies have driven a significant share of recent returns, reinforcing the need for diversification.
The reduction in equities has been reallocated to bonds, primarily through a 0.75% average overweight to US Treasuries. We believe markets may be overestimating the pace of future US interest rate rises which could support government bond returns if expectations ease.
US Treasuries also provide valuable diversification. In periods of weaker growth or market volatility, they can help offset some of the downside risk from equities. To fund our overweight positions, we remain underweight European investment grade corporate bonds, where yields continue to appear less attractive.
Overall, we remain constructive on both equities and government bonds. While market volatility is likely at times, we believe a diversified portfolio and a focus on medium-term opportunities remains the most effective way to navigate changing conditions.
Follow us on LinkedIn
Follow us on LinkedIn where you will be the first to see any news, views or support we think matters.
