Tactical Asset Allocation - March 2026

Global growth is strengthening, with synchronized improvements across regions. Our framework moves further into an expansion regime. Overweight equities versus fixed income, cyclicals, and underweight duration.

Our macro process drives tactical asset allocation decisions over a time horizon between six months and three years, on average, seeking to harvest relative value and return opportunities between asset classes (e.g., equity, credit, government bonds, and alternatives), regions, factors, and risk premia.

A strengthening business cycle is likely to prevail over the geopolitical shock

The coordinated US-Israel strike on Iran injected new uncertainty in financial markets, but we believe these developments are unlikely to derail economic fundamentals and a business cycle that’s gathering positive momentum. As illustrated by the sharp rise in oil and natural gas prices on Monday, March 2 (between 5-10% at the time of writing) energy prices represent the primary mechanism of contagion risk from markets to the real economy, particularly for Asia.  Ninety percent of crude oil transported through the Strait of Hormuz is directed to this region, with China (38%), India (15%), South Korea (12%), and Japan (11%) the primary destinations.¹ While shipping across the Strait currently remains active, increased risks can lead to a sharp increase in insurance costs and a de facto restriction on global supply, according to my colleagues Benjamin Jones and Paul Jackson.² In addition, while the oil infrastructure in the region hasn’t been disrupted, it remains a risk scenario to be considered.

This geopolitical shock occurs at a time when the global economy, however, is exhibiting noticeable strength, with synchronized and broad-based positive momentum across regions and sectors. Our global leading economic indicator is steadily moving above its long-term trend, reaching its highest level in four years, with positive contributions from both developed and emerging markets. Following the initial lead from Europe and Japan, US growth has now also moved above its long-term trend, led by strong improvements across cyclical indicators such as manufacturing activity, housing and construction, manufacturing business surveys, and consumer sentiment. This is the most consistent and synchronized improvement across regions since 2021, suggesting the global economy may be in a relatively strong position to weather the US-Iran conflict, rising energy costs, and macro uncertainty (Figures 1 and 2).

Credit spreads across sectors and geographies remain stable (at the time of this writing), suggesting limited contagion risk. Most of the market reaction seems concentrated in commodities, the US dollar, and US Treasury yields. We believe credit spreads and commodity prices will be key barometers to gauge the evolution of risk across assets. As discussed over the past few months, inflationary pressures have remained muted, but our inflation momentum indicators are beginning to capture the impact of rising commodity prices year-to-date, which, if sustained, can price out any bias for additional easing by the Federal Reserve this year. (Figure 3).

While it may be tempting to draw analogies with market developments following the start of the Russia-Ukraine conflict in February 2022, we believe the two episodes exhibit substantial differences in terms of macro backdrop. While both conflicts share a critical and direct impact on global energy prices, the severe 2022 global sell-off was primarily fueled by the meaningful rise in global bond yields, as central banks embarked on a synchronized tightening cycle from ultra-low interest rates. Back then, 10-year bond yields rose by more than 200 bps in the US and more than 250 bps in the Eurozone and the UK, leading to a sharp repricing of discount yields for all asset classes and downward adjustments to valuations (Figure 4). Today, global monetary policy is broadly neutral, and any repricing of inflation expectations may alter policy projections on the margin, but it’s highly unlikely to trigger new tightening cycles.

Overall, we believe the global economy is well-positioned to navigate the US-Iran conflict. While escalations could certainly move markets towards unfavorable scenarios, at this stage, our macro framework points to accelerating growth across regions, and resilient risk appetite towards cyclical assets, with more upside in equities than credit, given historically tight spreads across sectors. It’s important to maintain a dynamic approach towards incoming information and market developments, however, and we’ll closely monitor the evolution of credit spreads, energy prices, and financial conditions to anticipate signs of contagion risk and rising risk aversion. 

Investment positioning 

We maintain a higher portfolio risk profile relative to the benchmark in the Global Tactical Allocation Model,³ with an overweight in equities relative to fixed income, while maintaining regional exposures in line with the benchmark. In fixed income, we maintain a moderate overweight in credit risk⁴ and a significant underweight in duration versus the benchmark (Figures 5 to 8). In particular:

• In equities, we maintain overweight exposure in cyclical sectors but with a more balanced exposure between value, momentum, and mid-cap equities relative to large-caps. As the economy improves and moves further above trend, we continue to expect sectors with higher operating leverage to outperform. We favor financials, industrials, materials, and energy at the expense of health care, staples, utilities, and technology. We maintain a regional composition in line with the benchmark, given mixed signals among key drivers of relative performance between US, developed ex-US, and emerging market equities. While the US continues to exhibit the strongest earnings momentum across regions, dollar depreciation pressures driven by narrowing yield differentials, and positive surprises in global growth, provide offsetting tailwinds for international equity markets. As a result, we maintain a neutral position and express no active views on regional exposures at this stage, waiting for a more decisive alignment in macro drivers.
• In fixed income, we maintain a moderate overweight in risky credit, harvesting higher yields relative to investment grade and government bonds in an environment of improving growth and stable inflation. Further spread compression is highly unlikely at this stage, but a stable macro environment remains favorable for carry trades. We look for diversification across high yield, leveraged loans, and emerging markets dollar debt, and underweight investment grade credit and sovereign fixed income. As global leading economic indicators (LEIs) move further above trend, we maintain an underweight duration stance, expecting global yield curves to continue to steepen. Our bearish positioning on the US dollar favors emerging markets local debt, global fixed income, and currency unhedged, relative to core domestic fixed income. Given early signs of rising inflation, driven by commodity prices, we moderately overweight Treasury Inflation-Protected Securities (TIPS) relative to nominal Treasuries.
• In currency markets, we continue to underweight the US dollar, driven by narrowing yield differentials relative to the rest of the world, and positive surprises in economic data outside the US. Within developed markets, we favor the euro, Canadian dollar, Norwegian kroner, Singapore dollar, and Japanese yen relative to the Swiss franc, British pound, Swedish krona, and Australian dollar. In EM, we favor high yielders and attractive valuations, such as the Colombian peso, Brazilian real, Indian rupee, Indonesian rupiah, and Taiwan dollar relative to low-yielding or more expensive currencies such as the South African rand, Mexican peso, Chilean peso, and Chinese renminbi.

Investment risks

The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations), and investors may not get back the full amount invested.