The risk/reward profile for equities is becoming less compelling, while we have concerns around inflation risks. Find out more in Schroders latest multi-asset views, from Patrick Brenner, Chief Investment Officer, Multi Asset, Schroders.
We continue to assign a low probability to a US recession in the medium term. However, with markets pricing in a near-perfect macro backdrop – characterised by resilient growth and stable inflation – we believe the environment is increasingly vulnerable to disappointments over the coming months.
While tariff-related uncertainties have come down since ‘Liberation Day’, the targeted effective tariff rate is now trending higher than our baseline scenario. The risk of sudden, more aggressive tariff actions from the US administration remains a live concern. At the same time, questions around the reliability and consistency of labour data make it even more difficult to assess the potential lagged impact of tariffs on consumers. The current narrow balance between labour supply and demand appears unsustainable, increasing the chances of a negative growth surprise in the near term.
In parallel, we see growing risks to inflation. The US administration’s increasing pressure on the Federal Reserve (Fed) to cut rates, alongside concerns around the central bank’s independence and the persistence of aggressive fiscal stimulus, raises the likelihood of an inflation overshoot. We also remain concerned about the risk of stronger tariff pass-through, which could further exacerbate inflationary pressures.
In light of this backdrop, our view on equities has moved to neutral from positive, as we see the risk/reward profile for equities becoming less compelling in the near term.
Additionally, we have shifted to a negative view on government bonds, particularly on bonds with longer maturities. This reflects our concerns around both inflation risks and potential repricing of ‘term premium’, or the extra yield investors require to compensate for the risk of holding longer-dated bonds.
Despite recent strong performance, we maintain a positive view on gold, seeing it as a valuable diversifier in an environment of policy volatility, fiscal fragility, and growing investor uncertainty around the long-term role of US government bonds and the US dollar. Its role as portfolio insurance remains intact.
On currencies, we retain a negative stance on the US dollar. We continue to expect the dollar to be driven less by interest rate differentials, and more by portfolio rebalancing flows as investors reassess its strategic role in portfolios.
In conclusion, with the market pricing in a near-perfect scenario, we do not believe investors are adequately compensated for the risks we have identified – particularly on the inflation and growth fronts. As a result, we are moving tactically to a neutral stance on equities and a more cautious view on government bonds, particularly those with longer maturities.
To be clear, while we struggle in the short term to see the catalysts for the market to move significantly higher from here, we do not believe this marks the end of the cycle.
🟢 Long / positive
🟡 Neutral
🔴 Short / negative
🔼 Up from last month
🔽 Down from last month
Main Asset Classes
🟡🔽 Equities
We have turned neutral. Concerns over high valuations, stretched positioning and volatile labour data have resulted in a less compelling risk/reward profile for equities.
🔴 🔽 Government bonds
We have shifted to a negative view, particularly for bonds with longer maturities, reflecting our concerns around inflation risks and fiscal policy.
🟡 Commodities
We remain neutral on base metals, reflecting a weak global demand outlook. Our view on energy is also neutral, as we continue to anticipate higher supply. We maintain our positive stance on gold, supported by ongoing central bank demand.
🟡Corporate bonds (credit)
We remain neutral on credit. Stable fundamentals, strong financials earnings and a peak in debt costs are offset by expensive valuations relative to historical levels.
Equities
🟡🔽 US
While the probability of a recession remains low, a higher risk of negative growth surprises and high valuation levels mean we have downgraded US equities to neutral in the near term.
🟡 UK
Despite the recent rally, the deteriorating fiscal position and valuations appearing stretched relative to macroeconomic indicators keep us neutral.
🟡🔽 Europe ex UK
We have downgraded to neutral. Tariff risks and a strong currency are offsetting the domestic cyclical recovery and improving earnings within the small- and mid-cap sectors.
🟡🔽 Japan
Although supportive macro trends and policy incentives are emerging, company earnings remain less compelling than in other regions, prompting us to turn neutral.
🟡🔽 Global Emerging Markets (EM)1
EM equities continue to benefit from a weaker dollar and favourable policy developments in certain countries. However, we see no clear catalysts for prices to move up in the region.
🟡Asia ex-Japan: China
We maintain a neutral stance. Even though growth forecasts remain steady, ongoing concerns over domestic economic weakness and inflation pressures from tariffs persist.
🟡 EM Asia ex China
The region is supported by AI-related growth trends and favourable policy tailwinds. Nonetheless, we prefer to remain on the sidelines as the market is exposed to tariff risks.
1Global Emerging Markets includes Central and Eastern Europe, Latin America, and Asia.
Government bonds
🔴US
We are negative on US government bonds as fiscal vulnerabilities and the return of inflation concerns point to upward pressure on yields, particularly for bonds with longer maturity dates.
🟡 UK
The Bank of England has cut rates but signalled caution given ongoing inflation pressures. Although valuations remain relatively attractive, we remained neutral.
🟡🔽Europe
Germany’s fiscal expansion is expected to remain disciplined; however, persistent inflation and weak production data temper optimism, prompting us to turn neutral.
🟡 Japan
The Japanese government aims to keep long-term interest rates low, but we remain neutral in light of ongoing inflation concerns.
🟡 US inflation-linked bonds
We remain neutral, as lower energy and rental costs are offsetting the impact of higher tariffs.
🟢 Emerging markets local currency bonds
EM countries, particularly those in Latin America, are benefiting from supportive policy environments, a weaker US dollar, and high carry (i.e. higher interest rates than other regions). While valuations in Asia are starting to look less favourable, overall we remain positive on EM local debt.
Investment grade credit
🟡 US
Valuations remain expensive, and the reward for holding less liquid assets has significantly diminished. Nevertheless, although fundamentals and the technical backdrop remain supportive, we remain neutral.
🟡 Europe
We stay neutral, as valuations are less attractive despite favourable hedged yields and more muted inflation risk in the region.
🟡 Emerging markets USD
We remain neutral with the slightly more positive macro backdrop and marginal pick up in demand seen recently offsetting unattractive valuations.
High yield bonds (non-investment grade)
🟡US
Although spreads (the difference between government and corporate bond yields) have widened, valuations remain elevated, limiting further upside. Nonetheless, the sector could see support from generally favourable lending conditions.
🟡Europe
Valuations remain unattractive although the yield differential has widened relative to IG. There is plenty of demand for new issuance. Overall, we remain neutral.
Commodities
🟡Energy
We remain neutral on energy. Our base case remains for lower oil prices to prevail as we anticipate significantly higher supply to come online in the second half of the year.
🟢 Gold
Gold remains a valuable diversifier, supported by ongoing central bank purchases and providing a hedge against potential risks to the Federal Reserve’s independence and fiscal policy in the US.
🟡Industrial metals
After a sharp retracement in copper prices, the market now seems balanced. Demand indicators remain benign.
🟡 Agriculture
We remain neutral. Global crop conditions are robust, especially for wheat, corn, and soybeans, but there is little indication of clear price direction in the near term.
Currencies
🔴US $
We retain a negative stance on the US dollar, as evidence of a structural downtrend grows. Increasing portfolio rebalancing, driven by greater uncertainty over the dollar’s strategic role as a diversifier, continues to put downward pressure on the currency.
🟡 UK £
Price action continues to be driven mainly by US dollar dynamics rather than UK fundamentals. With moderating UK labour and services inflation and ongoing political uncertainty, we remain neutral on sterling.
🟢EU €
We remain positive on the euro. The currency is supported by macroeconomic growth momentum in the region and appears resilient to weaker relative performance in the equity market.
🔴 CNH ¥
We remained negative on Chinese yuan as recent data on retail sales and fixed asset investment remain weak, and expectations for further fiscal stimulus have diminished.
🟡🔽 JPY ¥
Amid persistent political uncertainty and the Bank of Japan’s reluctance to clarify its policy stance before the upcoming election, we have downgraded the Japanese yen to neutral.
🟡Swiss franc ₣
While the Swiss franc provides effective diversification, we maintain a cautious stance given its significantly lower interest rate relative to other currencies.
