Strategic adjustments after a strong summer for equities

Global equity markets continued to grind higher during the summer, supported by upward revisions to expected GDP growth and corporate earnings and the increased confidence that the Federal Reserve will soon cut interest rates.

In August, the MSCI World All Countries index posted a solid gain of 2.5%, bringing the year-to-date performance to more than 14% in US dollar terms. The market advance in 2025 has been led by emerging markets, returning around 17% so far in 2025. However, developed markets caught up a little in August, supported by the recovery of US small caps, which rose 7% over the month. In terms of style, there was a rotation in favour of value sectors, although growth sectors have outperformed year-to-date.

One of the key moves in bond markets in August was the stabilisation of US Treasury yields while European government bond yields, including in Germany, France and the UK, rose moderately. The driver of this move differed by country, with German yields reflecting an improved growth outlook and French and UK yields incorporating investors’ increased concerns about the trend in public debt metrics.

More attractive bond yields in Europe likely played a role in the renewed weakness of the US dollar, which fell more than 2% on a trade weighted basis. While the US dollar depreciated, precious metals prices, including those of gold and silver, surged to new historical highs.

The favourable performance of equity markets followed decreased concern about the impact of US tariffs on global growth and the evidence that corporate earnings growth remains solid. However, at current levels, the valuation of global equities looks dear and, cognisant of the adverse seasonality in September, raises the risk of a temporary correction.

To reflect our updated expectations, we have cut our equity weighting to take some profits, and now are only marginally overweight in equities. We remain overweight to the US as well as to Asia ex-Japan and emerging markets. Europe remains underweight, which, at the moment, is a non-consensus call. Proceeds from the equities reduction went to cash to fund any purchases if there is a pull-back, as longer term we remain constructive. Within fixed income, we continue to prefer 3-5 year maturity bonds and fear a long-dated bond sell off in the UK, in particular, as bond vigilantes are prowling.

Asset Allocation

Global Allocation

Although overall economic conditions remain supportive, we are taking some risk off the table. Positive earnings revisions support underlying market trends but equity valuations have become more expensive. Given the level of performance over the last few months we are reducing our equity allocation, bringing it closer to neutral but still marginally overweight versus the benchmark. We also note that September is normally seasonally weak, so this could reduce risk in portfolios should there be a market dip. The reduction in equities will see cash levels increased, moving from an underweight to a modest overweight.

We are mindful not to reduce risk too much, given that the Federal Reserve is expected to cut interest rates in September and central bank policy overall is supportive of markets. No changes are being made to our fixed income allocation, remaining underweight. Our alternatives position also remains unchanged at a marginal overweight.

Fixed Income

The long-end of the curve remains challenging with yield curves steepening, reinforcing our preference for shorter duration which is in line with the benchmark. There are growing concerns around the UK gilt market as the Autumn budget approaches. The UK bond market looks weak and there may be a potential contagion risk to other European markets should there be any issues. This is an area we will monitor carefully but for now we will maintain a neutral weighting for UK sovereign bonds. One change that is being made is to further reduce our Swiss sovereign bond exposure, reflective of a negative yield at the shorter end of the curve, moving into investment grade instead. In our view high yield bonds still looks supported so we hold on to an overweight for USD bonds and a neutral positioning on EUR bonds.

Equities

No changes were made to our equity country exposure. The EFGAM equity valuation model shows that valuations are on the expensive side, with emerging markets appearing as the cheapest in the group. Technical factors in Japan have improved and turned positive and equities have seen strong recent performance. This is an area we will keep watch of, but for now we continue to be underweight, noting that the latest Bank of America Fund Manager’s Survey showed investors were also positioned underweight. No changes are being made to the US allocation although we note that the benchmark weighting has edged marginally higher, meaning that we are now in line with it. Greater clarity on rates cuts would be helpful in terms of adding to our US small cap position and we would also consider buying into any sell-off, contingent on the reasons for it. We also have a preference within Swiss equities for small caps owing to falling rates, but for Switzerland as a whole we are underweight.

Equity Sectors

Equity Sector Views

UK
Given ongoing geopolitical risks, inflationary pressures, and slowing economic growth, we had increased our exposure to defensive industrial names (including aerospace and defence), with the sector remaining our largest overweight. We continue to see an opportunity for the outperformance of UK midcaps over the coming quarters, reversing a multi-year period of underperformance due to high inflation and interest rates, both of which are now expected to normalise. Information technology has been a sector in which we have found specialist UK companies trading on attractive valuations in our view backed by strong structural growth tailwinds.

US
We are overweight in information technology and communication services, as Cloud and artificial intelligence investments continue to grow strongly and there have also been upward earnings revisions. Our financials positioning is also overweight versus the benchmark, as macro conditions remain healthy and the sector could benefit from deregulation. We remain underweight in healthcare, due to heightened political uncertainties.

Europe
European financial exposure is being reduced further underweight, to take some profits after a period of strong performance, with the sector looking particularly overbought. With this, we will move proceeds into healthcare where valuations appear relatively attractive after recent weakness. This pushes up our allocation to healthcare from an underweight to an overweight. The EFGAM Trend & Momentum model points to all sectors being in an uptrend besides consumer staples, to which we are marginally underweight.

Alternatives

Once again, our alternatives positioning is left unchanged. Insurance holds an overweight, although we previously noted the seasonal soft closure of some catastrophe bond funds in this space. We are also overweight hedge funds although performance across strategies has been mixed. The underperformance of Commodity Trading Advisors (CTAs) has been disappointing, whilst market neutral strategies have fared better year-to-date. Gold remains our only exposure within commodities, in which we are underweight, seeing no catalysts to become more positive.

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