A calmer second half?

Global equity markets extended their rally in June, with many reaching new historical highs as the MSCI All Country World Index gained 4.5% gain over the month. The performance in the first half of the year exceeds 10% in US dollar terms and the increased momentum of the last few weeks bodes well for the coming months.

The solid performance in June came despite the escalation of tensions between Israel and Iran in the first part of the month, culminating in the US bombing of Iranian nuclear sites. The truce that followed helped to support investor sentiment, especially towards the US and emerging markets.

However, European markets suffered in June for two main reasons: (i) the increase in oil prices following the rise in tensions in the Middle East and (ii) the appreciation of the euro and other currencies against the US dollar and Asian currencies. These elements overshadowed the presentation of the new German government’s fiscal plan for the 2025-26 period, which could give a stronger-than-expected boost to growth.

The performance of the US stock market was also supported by progress of Trump’s fiscal plan in Congress. The “One Big Beautiful Bill Act” extends tax cuts for families and businesses and increases expenditure on defence and border protection even if at the cost of a further increase in US public debt.

Nonetheless, government yields fell in response to slowing inflation and moderating GDP growth. Futures are now pricing in two more rate cuts from the Federal Reserve before the end of the year and one more from the European Central Bank.

The prospect of more accommodative monetary policy from the Fed added to the headwinds facing the US dollar. Indeed, the dollar index’s fall in the first half of the year was the steepest in more than 50 years. While the medium-term outlook remains challenging, investor pessimism towards the US dollar has reached an extreme level that in the past was often followed by a short-term recovery in its exchange rate.

In this context, it remains advisable to maintain a limited overweight in portfolio risk assets at the expense of bonds and cash. We remain overweight equities, where we are now overweight in the US. We have reduced European equities to marginally underweight and moved overweight in emerging markets. The rationale is one where we see momentum in the US continuing and Europe lacking further catalysts. Within fixed income, we remain in the 3-5 year part of the curve, and remain alert to the possibility of a long-bond sell off in the US and the UK, as bond vigilantes are prowling.

Asset Allocation

Global Allocation

One of the Trump administration’s aims is to achieve strong nominal GDP over the coming years and we expect this to come into greater focus, especially as a way to help solve issues around the elevated debt-to-GDP ratio. As a result, policies undertaken in the coming months are expected to favour a reacceleration of growth, reflected in the likelihood that Trump will back away from trade war escalation.

Together with the fiscal bill that was passed in early July, this has helped reduce market uncertainty, providing a more optimistic outlook for equity markets. Furthermore, technical factors are supportive. With positioning already quite risk-on, no significant changes are being made, slightly increasing our equity allocation in line with the market drift. Meanwhile fixed income is being slightly reduced, extending our underweight. Our modest alternatives overweight and cash underweight are held.

Fixed Income

No changes are being made to our fixed income positioning. Last month we neutralised our duration exposure, increasing it from 3.5 years to 4 years. We note that there are still risks to the long end of the curve, supporting our preference for shorter duration. Convertible bonds have been amongst the strongest performers within the asset class so far this year and we maintain our overweight position. High yield also continues to do well and we maintain our neutral euro weighting and a modest US dollar overweight versus the benchmark. Macro and technical factors continue to appear favourable for investment grade bonds, holding overweight positions across all currencies.

Equities

Our US equity weight is being increased, moving from a slightly below benchmark position to a modest overweight. This is to reflect the dissipating risks from the fiscal bill, tariffs and recent events in the Middle East. We note that risk appetite within smaller US companies appears to be increasing with recent IPOs performing particularly well. Our EFG trend and momentum models show that all sectors in Latam are pointing to an uptrend. In addition, Brazilian rates appear to have peaked, the Mexican authorities have managed the tariff debacle well and a weaker US dollar should be supportive. As a result, we increase our exposure to Latin America equities. We are also adding to the EMEA region following an abatement of risk in the Middle East.

To fund these moves we are trimming our European and UK exposure. European equities will be taken down below the benchmark weighting as we take profits. The good news on the German fiscal spend and European Central Bank rate cuts are priced in and at the moment we can't see any new catalysts. Similarly for the UK, the Bank of England remains on the sidelines for the time being, and there is a notable lack of potential catalysts. Currency considerations are also a factor given that the US dollar is heavily oversold in our view.

Equity Sector Views

UK
Given increasing risks from geopolitics, inflationary pressures, and slowing economic growth, we previously 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 neutral in 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
Outside of the changes to account for market drift, healthcare is being reduced from neutral to underweight. The materials sector is also being reduced, moving from an overweight to a modest underweight allocation. Technology positioning has been increased to an overweight position from neutral, while industrials is also added to, reducing the underweight level. For Europe overall we maintain a preference for value, contrasting that of our preference for growth in the US.

Alternatives

Our industrials weighting is being added to, taking it up to neutral, driven by strong momentum as a result of improving economic growth prospects and fiscal stimulus, notably in defence. Energy is also being increased but remains slightly underweight. These changed are being funded by a reduction in our technology overweight and consumer discretionary falling from a slight overweight to a modest underweight. In consumer discretionary we see weak earnings momentum, particularly in luxury names.

Important Information

The value of investments and the income derived from them can fall as well as rise, and past performance is no indicator of future performance. Investment products may be subject to investment risks involving, but not limited to, possible loss of all or part of the principal invested.

This document does not constitute and shall not be construed as a prospectus, advertisement, public offering or placement of, nor a recommendation to buy, sell, hold or solicit, any investment, security, other financial instrument or other product or service. It is not intended to be a final representation of the terms and conditions of any investment, security, other financial instrument or other product or service. This document is for general information only and is not intended as investment advice or any other specific recommendation as to any particular course of action or inaction. The information in this document does not take into account the specific investment objectives, financial situation or particular needs of the recipient. You should seek your own professional advice suitable to your particular circumstances prior to making any investment or if you are in doubt as to the information in this document.

Although information in this document has been obtained from sources believed to be reliable, no member of the EFG group represents or warrants its accuracy, and such information may be incomplete or condensed. Any opinions in this document are subject to change without notice. This document may contain personal opinions which do not necessarily reflect the position of any member of the EFG group. To the fullest extent permissible by law, no member of the EFG group shall be responsible for the consequences of any errors or omissions herein, or reliance upon any opinion or statement contained herein, and each member of the EFG group expressly disclaims any liability, including (without limitation) liability for incidental or consequential damages, arising from the same or resulting from any action or inaction on the part of the recipient in reliance on this document. The availability of this document in any jurisdiction or country may be contrary to local law or regulation and persons who come into possession of this document should inform themselves of and observe any restrictions. This document may not be reproduced, disclosed or distributed (in whole or in part) to any other person without prior written permission from an authorised member of the EFG group.

This document has been produced by EFG Asset Management (UK) Limited for use by the EFG group and the worldwide subsidiaries and affiliates within the EFG group. EFG Asset Management (UK) Limited is authorised and regulated by the UK Financial Conduct Authority, registered no. 7389746. Registered address: EFG Asset Management (UK) Limited, 116 Park Street, London W1K 6AP, United Kingdom, telephone +44 (0)20 7491 9111.

Independent Asset Managers: in case this document is provided to Independent Asset Managers (“IAMs“), it is strictly forbidden to be reproduced, disclosed or distributed (in whole or in part) by IAMs and made available to their clients and/or third parties. By receiving this document IAMs confirm that they will need to make their own decisions/judgements about how to proceed and it is the responsibility of IAMs to ensure that the information provided is in line with their own clients’ circumstances with regard to any investment, legal, regulatory, tax or other consequences. No liability is accepted by EFG for any damages, losses or costs (whether direct, indirect or consequential) that may arise from any use of this document by the IAMs, their clients or any third parties.