The economic outlook may have improved, but we believe large parts of the credit and equity markets are fully valued.

The Asset Allocation Committee (“the AAC”) is more positive on the economic outlook than it has been for several quarters. Recession concerns have lifted, and while inflation could remain sticky, we think it is likely to continue to normalize. As investors shift focus from inflation and rates to the growth outlook, market dynamics such as stock-bond correlations have also begun to normalize. Our asset-class views retain their overall balance, which in part reflects this normalizing trend. The reluctance to take a more positive view on risky assets reflects ongoing geopolitical and U.S. election uncertainty, the full valuations in large parts of the market, and the concern that general economic resilience hides growing bifurcation between thriving “haves” and struggling “have-nots.” The resulting balance extends into our view within asset classes. We favor broad equity exposure that encompasses more attractively valued, out-of-favor parts of the market, in anticipation of an end to the recent very narrow leadership in performance. In fixed income, we prioritize quality and income in the belly of the curve, between two and seven years. While we favor credit risk and locking in yield in anticipation of declining cash rates, we are cautious about the uncertainty around longer-term interest rates and debt sustainability. Our only two underweight views, on cash and hedged strategies, emphasize this theme of maintaining equity and fixed income positions to benefit from the current environment. Our overweight views on commodities and private markets reflect ongoing inflation and geopolitical risks and rich opportunities in illiquid assets, respectively.