Tactical Asset Allocation - January 2026

The growth and inflation mix remains supportive. Overweight equities versus fixed income, favoring value, 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

Growth continues to gain momentum across developed markets outside the US. All countries covered in our framework improved over the past month and continue to move above their long-term trend, namely Eurozone, UK, Sweden, Switzerland, Japan, South Korea, Canada and Australia. Furthermore, the improvement was broad-based across economic sectors, such as consumer sentiment, trade, business surveys, manufacturing activity, and housing and construction activity. 

The re-steepening of yield curves across developed markets, with long-term rates above short-term rates between 70-100bps, is indicative of easier monetary conditions which, coupled with expansionary fiscal policies, provide additional tailwinds to future growth. Overall, the composite Developed ex-US LEI moves further above its historical long-term trend, indicative of above-trend economic growth prospects. 

Growth in emerging markets remains stable but below trend, with improvements in manufacturing activity, business surveys, and trade offsetting weakness in housing and consumer sentiment (Figures 1 and 2). Inflationary pressures continue to fade across regions, dissipating fears of tariff-induced price increases and increased labor costs due to immigration controls in the United States (Figure 3). Overall, our framework confirms a growth and inflation mix consistent with a goldilocks scenario, favorable for risk assets and cyclical exposures, with more upside for equities than credit given historically tight spreads across sectors. 

However, given expensive valuations across most asset classes, risks remain asymmetrically skewed in the short term, with more downside risk to be expected in case of negative economic surprises relative to the upside potential from favorable news. This asymmetry is more evident in the technology sector where sentiment has somewhat soured in recent weeks, and a more balanced perspective has emerged regarding the distribution of risks and strength of fundamentals. In particular,

• The size and cost of AI capex, with increased competition and a more commoditized output, is raising awareness about a potentially wide range of future outcomes, with a spectrum of winners and losers likely to experience a different return on investments. Industry estimates see capex investments range between$5-10 trillion by 2030, mostly on data centers and power infrastructure, with uncertainty regarding which players will be able to create a sustainable revenue model to offset operating costs.
• Free cash-flow uncertainty, and lower growth. While earnings growth in the sector remains strong, it is likely to decelerate going forward. Earnings growth is projected to be 18% in 2026, the slowest in four years and only slightly better than the S&P 500, according to data compiled by Bloomberg. This could put pressure on buybacks and dividends.
• Private debt financing, financial engineering and securitization represent a growing source of funding for the industry, with AI-spending no longer being supported solely by free cash flows, therefore creating a more opaque understanding of credit channels and how risk is being distributed in the system.

We believe broader diversification across equity sectors and regions is a prudent way to maintain an overweight posture in risky assets while avoiding the more expensive corners of the market. Since last November, our shift towards value, small and mid-caps has been helpful in navigating short-term equity volatility. Furthermore, broad diversification between US and non-US equities should benefit from expected US dollar depreciation, driven by narrowing yield differentials as the Federal Reserve continues to lower interest rates.

Investment positioning 

We have not implemented changes in the Global Tactical Allocation Model¹ 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 risk² and neutral duration (Figures 4 to 7). In particular:

• In equities, we maintain overweight exposure in cyclical sectors, value, small-/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 are 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 the Japanese yen relative to the Swiss franc, Canadian dollars, Swedish krona, and Singapore dollar. In EM 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 such as the Korean won, Philippines 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.