Tactical Asset Allocation - April 2026

Rising geopolitical tensions are beginning to weigh on global growth expectations, despite continued economic resilience. Decelerating risk appetite moves our framework to a slowdown regime, reflecting a more balanced and defensive posture in response to elevated uncertainty, rather than a fundamental shift in the economic cycle.

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.

Historically large energy shock begins to weigh on the global economic cycle

The global economy entered the month supported by a relatively constructive backdrop, with growth running above trend and market sentiment benefiting from still‑accommodative financial conditions. However, as discussed in our previous update, this environment remained vulnerable to a material escalation in geopolitical risks, particularly the potential for direct and sustained damage to energy infrastructure to disrupt global oil supply.

Since the onset of the conflict in late February, escalating attacks on key energy infrastructure, heightened security risks across the Persian Gulf, and disruptions to major transportation routes have sharply reduced effective global oil supply. Historically, the magnitude of supply at risk stands out relative to other major geopolitical oil disruptions, even as it unfolds during a period when global economic activity remains broadly resilient and above trend.

Forward‑looking, scenario‑based analysis underscores that the macroeconomic consequences of a disruption at the Strait of Hormuz depend at least as much on its duration as its initial scale. Modeling of geopolitically driven oil supply shortfalls suggests that even a closure lasting a single quarter — removing a substantial share of global oil flows — can lead to materially higher energy prices and a meaningful drag on global real GDP growth. Extensions of the disruption into a second or third quarter amplify these effects non‑linearly, as energy prices rise further and growth impacts persist beyond the period of peak supply constraints.¹

Crucially, while growth rates may rebound once oil shipments resume, the level of economic activity typically remains below its pre‑shock trajectory, due to delayed investment, tighter financial conditions, and the cumulative effects of elevated energy costs on demand. More broadly, the macroeconomic relevance of this shock extends well beyond energy markets. Large oil supply disruptions have historically acted as a tax on global demand, disproportionately affecting oil‑importing regions while constraining policy flexibility at a time when central banks remain sensitive to inflation risks. It's not only the level of energy prices but also the uncertainty surrounding the duration and persistence of supply shortfalls that amplifies the macroeconomic impact, as even the expectation of a prolonged disruption can weigh on confidence, investment, and growth.

Against this backdrop, our latest readings of leading economic indicators (LEI) continue to point to a global economy that remains broadly resilient, with LEI stability intact across regions. Growth levels in the US and developed markets outside the US remain above trend, supported by resilient domestic demand and constructive cyclical dynamics. 

At the same time, the future path of leading indicators is increasingly contingent on developments in the Middle East, particularly the duration and eventual resolution of the conflict and its implications for energy supply. The transmission from large energy shocks to realized economic data typically occurs with a lag, as higher costs, uncertainty, and tighter financial conditions gradually feed through to consumption and investment. In this environment, the coexistence of still‑firm economic fundamentals and cooling market‑implied growth expectations leads our framework to identify a transition to a slowdown regime, defined by decelerating market‑implied risk appetite rather than a deterioration in underlying economic activity (Figures 1a, 1b, and 1c).

In parallel, market‑implied growth expectations have adjusted lower. Our measure of global risk appetite has decelerated materially from recent highs even as LEIs remain above trend, a combination consistent with historical transitions from expansion to slowdown (Figure 2). As compensation for growth risk diminishes, risk‑sensitive assets become increasingly vulnerable to adverse surprises.

Rising energy prices are also translating into higher inflation momentum across regions. Our inflation momentum indicators have accelerated for a third consecutive month, driven primarily by energy inputs (Figure 3). This dynamic complicates the policy outlook, particularly for central banks in energy‑importing economies, where stronger near‑term inflation pressures may coexist with deteriorating medium‑term growth prospects.

Taken together, these developments suggest that the global expansion is transitioning into a phase of slower growth rather than ending abruptly. While upside scenarios — such as a rapid de‑escalation of the conflict and normalization of energy supply — could re‑establish stronger momentum, the escalation of geopolitical risk has introduced a more uncertain operating environment. Elevated energy costs, tighter financial conditions, and heightened uncertainty are beginning to weigh on growth expectations, even as underlying activity remains broadly resilient.

Consistent with historical transitions from expansion to slowdown, this phase of the cycle has typically been associated with a moderation in excess returns across risky assets and a narrower margin for error as growth expectations adjust. In these environments, dispersion across assets tends to compress, sensitivity to adverse surprise increases, and maintaining a more balanced portfolio posture has historically proved effective as the cycle enters a more uncertain phase.

Investment positioning 

Transitions from expansion to slowdown regimes have historically been associated with modest but generally positive returns across asset classes, alongside a convergence in performance between growth‑sensitive and defensive assets. As markets adjust to near‑term expectations rather than long‑term growth trajectories, compensation for growth risk tends to moderate, and the balance of risks becomes less asymmetrically favorable. In these environments, portfolio outcomes have typically been driven less by broad directional exposure and more by balance, selectivity, and flexibility as uncertainty evolves (Figures 4 to 7).

• Within this context, we've moved to an overall risk‑neutral stance relative to the benchmark, reflecting a deliberate risk‑management response, rather than a shift to a defensive, risk‑off posture. This positioning is intended to preserve optionality, allowing portfolios to participate should growth momentum stabilize, while maintaining resilience to adverse developments. Within this framework, we remain moderately overweight equities relative to fixed income, but with a clear emphasis on defensiveness and earnings visibility rather than cyclical acceleration.
• In equities, we overweight defensive factors such as quality and low volatility, which have historically performed well in slowdown regimes through more stable cash‑flow profiles and lower sensitivity to changes in growth dynamics. At the sector level, we favor exposures with defensive characteristics and durable fundamentals, including information technology, health care, and consumer staples, at the expense of more cyclical areas. From a regional perspective, we maintain benchmark‑aligned allocations, as opposing macroeconomic forces continue to offset one another. While the US continues to exhibit the strongest earnings momentum across regions, higher short‑term interest rates and ongoing positive economic surprises outside the US provide important counterweights for international equity markets. In this environment, we remain neutral across US, developed markets ex‑US, and emerging markets, awaiting a clearer and more durable alignment across earnings trends, interest‑rate differentials, and growth dynamics before expressing active regional tilts.
• In fixed income, we've adjusted portfolio exposures toward a moderate underweight in overall credit risk, reflecting a balance of risks that currently appears less favorable for spread‑based compensation relative to other sources of return within a diversified portfolio. Additionally, we've increased exposure to interest‑rate duration, primarily as a risk‑management tool. As the framework transitions into a slowdown regime, risks become increasingly skewed toward weaker growth outcomes, and duration has historically provided diversification and downside protection under such conditions. Finally, given the recent acceleration in inflation momentum, we express this duration exposure with a preference for inflation‑linked securities over nominal Treasuries, allowing portfolios to retain sensitivity to real‑rate dynamics while addressing near‑term inflation risks.
• In currency markets, we maintain an underweight exposure to the US dollar, reflecting higher and rising short‑term interest rates outside the US, alongside continued positive economic surprises in several non‑US economies. 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, New Zealand dollar, and Australian dollar. Within emerging markets, we favor higher‑yielding currencies with attractive valuations, including the Colombian peso, Brazilian real, Indian rupee, and Taiwan dollar, relative to low‑yielding or more expensive currencies such as the South African rand, Mexican peso, Czech koruna, and South Korean won.

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.