Goal Asset Allocation Balancing Micro Tailwinds And Macro Headwinds

This report outlines a balanced tactical strategy amid macro headwinds and micro tailwinds. It highlights late-cycle risks, elevated equity valuations, and a shift towards reflationary pricing.

Key Takeaways

• 1.Tactically neutral, modestly pro-risk for 12 months.
• 2.Markets are pricing a 'reflationary' backdrop with growth optimism but less dovish monetary policy.
• 3.Equities/bond correlations are more positive as markets price rate shocks over growth shocks.

Table of Contents

• Tactically neutral, modestly pro-risk for 12m
• The energy shock from Middle East war has weighed on the global growth/inflation mix
• A stagflationary shock with a pick-up in inflation as well as less policy easing
• The Momentum rally is nearing Tech Bubble levels but has been driven more by earnings
• Cross-asset sentiment and positioning are back to more bullish levels
• Our Risk Appetite Indicator has recovered quickly
• Markets are pricing a more 'reflationary' backdrop with growth optimism but less dovish monetary policy
• Growth optimism has been ahead of macro surprises, rates relief closely linked to central bank pricing
• Markets priced a “Balanced Bear” regime in March and shifted towards ‘Reflation’ since then
• Equity/bond correlations turned positive as markets priced a rate rather than a growth shock
• The drawdown for the World Portfolio was limited, especially compared to previous stagflationary shocks
• The speed of bond yield increases matters
• Rising bond yields due to sticky inflation and fiscal concerns push bond yields to levels that are difficult to digest for equities
• A stagflationary shock increases downside risks for 60/40 portfolios
• Inflation momentum should turn more negative in the second half of the year
• Our equity tail risk framework points to a negative asymmetry...
• US equity valuations are elevated but supported by macro conditions and high corporate profitability
• Equity risk premia are relatively low but again supported by macro conditions
• Being underinvested late cycle can be costly, with equities usually performing well up until the bull market peak
• Global investor portfolios are more exposed to innovation but have less protection from inflation
• In late-cycle backdrops, investors need to be selective about risk management strategies - 1996-2002 can provide a useful case study
• Current low risk premia signal poor asymmetry for carry trades and increased vulnerability to both growth and rate shocks
• All-in credit yields are elevated, but credit spreads and term premia are relatively low
• Credit offers poor asymmetry late cycle as tight spreads limit upside but there is material downside in case of a recession
• The Dollar has become less 'risk off' in 2025, while Gold has been more correlated with equity recently
• Long-Term Asset Allocation Strategy
• Cross-asset volatility hedges
• Few risk mitigation strategies have worked YTD
• Put spread collars attractive to protect after strong rally
• Key views and forecasts across assets

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