Tactical Asset Allocation - November 2025

Moving to a recovery regime. Increasing portfolio risk, overweighting equities versus fixed income, favoring value, small- and mid-caps. Moderately increasing credit risk and reducing duration back to neutral. Underweight US dollar exposure.

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: Moving to a recovery regime

Following 16 consecutive months in a contraction regime of below-trend and decelerating growth, our macro framework moves to a recovery regime, driven by the steady rise in market-implied growth expectations, captured by our global risk appetite cycle indicator. As per our rules-based process, global risk appetite has reached a significant inflection point, indicative of a potential improvement in the growth cycle over the next few months and quarters (Figures 1 and 2). What is driving this transition, and how do we interpret its significance following a prolonged period of defensive positioning in our portfolios?

The contraction that never turned into a recession

As described in detail in last month's Tactical Asset Allocation note, we believe our framework correctly anticipated, by and large, the deceleration in US and global GDP growth to below-trend growth rates this year. This is further validated by the noticeable weakening in labor markets, and the underperformance in earnings and sales growth for cyclical equity sectors relative to defensive sectors. However, this low-growth environment did not experience sufficient negative momentum, tightening in credit conditions, and negative consumer sentiment, which have historically been necessary catalysts to turn a low-growth environment into a recession. Instead, the structural tech super-cycle, renewed fiscal policy stimulus, and the de-escalation of global trade tensions appear to be significant tailwinds, sufficient to offset the weakness in other sectors such as manufacturing, housing, trade, and overall employment. 

Transitioning to a recovery regime, but not the start of a new cycle. What does it mean, and how long may this last?

At this stage, the resilience in global equity and credit markets has the potential to further extend this business cycle, supporting consumption via wealth effects. Furthermore, stable inflation and soft labor markets are supporting a gradual, but steady, easing in monetary policy, lower borrowing costs, and easing in credit conditions. Our interpretation is that markets are anticipating a goldilocks scenario where broad-based policy support, both fiscal and monetary, will be sufficient to offset the deterioration in private sector fundamentals, keep inflation stable (Figure 3), and push back recession risks, yet again. This interpretation is further evidenced by shifts in monetary policy pricing year to date, with expectations moving from two rate cuts to four cuts by the end of 2026, and stable breakeven inflation expectations over the past 10 months. This unique ‘goldilocks’ scenario is typically supportive of risk assets. 

Crucially, this recovery regime does not represent the start of a new business cycle but a continuation of the current cycle that followed the COVID-19 recession in 2020, as the unemployment rate and credit spreads remain close to cycle lows. In other words, both the economic and financial systems have not experienced the typical resets indicative of the end of the cycle, such as the creation of spare capacity in labor markets, inventory depletion, decreased industrial capacity utilization, and deleveraging of balance sheets. We believe this recovery regime is likely to last between a few months and a couple of quarters, with the potential to deliver modest positive returns across risky assets, hence warranting a change in portfolio positioning until new economic developments become available.

Investment positioning 

Following the transition of our macro framework to a cyclical recovery, we have implemented several changes in the Global Tactical Allocation Model.¹ We increase overall portfolio risk above benchmark, moving to a moderate overweight in equities relative to fixed income, tilting towards value, small- and mid-capitalizations. Therefore, this higher equity allocation is accompanied by cheaper equity valuations, in sectors and styles that have lagged the market rally of the past two years, effectively rebalancing from expensive defensive sectors and factors, which now trade at an average forward P/E of 19.5x in the S&P 500, to cheaper cyclical sectors trading at an average 8.5x forward multiple. In fixed income, we increase credit risk² to a moderate overweight relative to benchmark and reduce duration back to neutral following the decline in bond yields (Figures 4 to 8). In particular:

• In equities, we reduce exposure in defensive sectors, quality, low volatility, and momentum stocks, going overweight in cyclical sectors, value, small/mid-cap equities as these segments of equity markets carry higher operating leverage and tend to outperform during cyclical economic 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 offsetting drivers of relative performance between US, developed ex-US, and emerging market equities. On one hand, US earnings momentum continues to outperform other markets, mostly driven by technology, favoring US equities. On the other hand, our currency framework still points towards US dollar depreciation, driven by narrowing yield differentials for the greenback and positive surprises in global growth, hence favoring non-US unhedged equity exposures. As a result, we express no active views in regional exposures.
• In fixed income, we increase credit risk to a moderate overweight. However, given spreads near all-time lows, the case for risky credit is limited to harvesting higher yields relative to quality credit 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 increase the allocation 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, British pound, Norwegian kroner, Australian dollar, and Japanese yen relative to the Swiss Franc, Canadian dollar, Swedish krona, and Singapore dollar. In EM, we favor high yielders with attractive valuations as the Colombian peso, Brazilian real, Indian rupee, and Indonesian rupiah, relative to low yielding, and more expensive currencies, such as 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.