Tactical Asset Allocation - December 2025

Favorable growth and inflation backdrop, supported by monetary and fiscal policy. Overweight equities versus fixed income, favoring value and small- and mid-caps. Moderately overweight credit risk, neutral duration, and underweight the US dollar.

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.

Macro update

The macro backdrop continues to improve at a gradual and steady pace, in a context that can be described as “no news is good news” for financial markets. The US economy is broadly stable, sustaining a growth rate that is just marginally below trend based on our framework. The resumption of economic data releases, after the US government opened, has not delivered any newsworthy negative surprises, as initially feared. While the health of the labor market remains the primary concern of the Federal Reserve and financial markets, retail spending shows resilience as we enter the holiday season, with preliminary data showing mid-single-digit growth year over year.¹

Noticeably, growth is gaining momentum in the rest of the world, led by developed markets outside the US. Leading economic indicators continue to improve at a noticeable clip in the eurozone and the UK, now moving above their long-term trend, with broad-based improvements across manufacturing business surveys, consumer sentiment surveys, housing, and trade activity. In emerging markets, growth remains stable but below trend, with weakness in trade and the construction sector offsetting the improvements seen in manufacturing activity and business surveys (Figures 1 and 2). This favorable global backdrop is exemplified by upward revisions in earnings expectations across all regions, with developed ex-US and emerging markets catching up with the US, a sign of broader participation in the growth cycle across countries and economic sectors (Figure 3).

Overall, as we approach the end of 2025, the global economy has demonstrated remarkable resilience despite noticeable headwinds from global trade policy uncertainty, fear of renewed inflationary pressures, and a significant deceleration in employment growth. As we enter 2026, our barometer of global risk appetite points to improving growth expectations, supported by monetary policy easing, expansionary fiscal policy across developed markets, mainly the US and Europe, and lack of inflationary pressures (Figure 4). While we are in the later stages of the economic cycle, we believe this goldilocks scenario remains supportive of risky assets, with more upside in equities than credit. However, given expensive valuations and historically tight credit spreads, risks remain asymmetrically skewed, with more downside risk to be expected in case of negative economic surprises relative to the upside potential from favorable news. In this regard, our recent shift towards value and small- and mid- caps, and broad diversification between US and non-US equities, should provide better downside protection from cheaper equity valuations, tailwinds from US dollar depreciation, and broader equity sector participation. 

Investment positioning 

We have not made any changes in the Global Tactical Allocation Model² over the past month. We maintain overall portfolio risk above benchmark, with a moderate overweight in equities relative to fixed income, tilting towards value and small-/mid-capitalizations, and a regional exposure in line with the benchmark. In fixed income, we maintain a moderate overweight in credit risk³ and neutral duration (Figures 5 to 8). In particular:

• In equities, we maintain overweight exposure in cyclical sectors, value, and small- and mid-cap equities as these segments of equity markets carry higher operating leverage and tend to outperform during cyclical rebounds. Hence, we favor sectors such as 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. On one hand, US earnings momentum continues to outperform other markets. On the other hand, our expectations for dollar depreciation, driven by narrowing yield differentials for the greenback and positive surprises in global growth, favor international equity markets. As a result, we express no active views in regional exposures at this stage.
• In fixed income, we maintain a moderate overweight in credit but given spreads near all-time lows, the case for risky credit is limited to harvesting higher yields relative to investment grade and government bonds in an environment of improving growth and stable inflation. Therefore, we look for diversification across high yield, leveraged loans, and emerging markets dollar debt, and underweight investment grade credit and sovereign fixed income. Our bearish positioning on the US dollar also favors emerging markets local debt and global fixed income, currency unhedged, relative to core domestic fixed income. We maintain an overweight to TIPS relative to nominal Treasuries following the transition to a recovery regime, historically accompanied by widening breakeven inflation.
• 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, the British pound, Norwegian kroner, Australian dollar, and Japanese yen relative to the Swiss franc, Canadian dollar, Swedish krona, and Singapore dollar. In emerging markets, we favor high yielders with attractive valuations, such as the Colombian peso, Brazilian real, Indian rupee, and Indonesian rupiah, relative to low-yielding and more expensive currencies like the Korean won, Philippine peso, Thai baht, 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.