Improving liquidity supports the US growth outlook

The US economy continues to demonstrate resilience, with economic data remaining buoyant and showing increasing signs of broadening. There are already initial signs of this broadening within the credit cycle, where momentum is no longer confined to areas that previously dominated, such as private credit.

As we continue through 2026, growth is expected to remain robust and broaden, supported by the lagged impact of monetary easing, improving liquidity conditions as the Federal Reserve returns to balance sheet expansion and front-loaded fiscal spending that supports consumers. Disinflationary forces in shelter and other key components are likely to be offset by inflationary pressures arising from challenging base effects and an improving demand backdrop, with further upside risks from energy and commodity prices as the implications of the Iran war continue to weigh on global supply chains. As a result of these dynamics, we expect US risk assets to remain supported, with the potential for a broadening of performance drivers as liquidity conditions ease and demand recovers. The labour market, however, remains a key risk to monitor.

Europe’s recovery builds, despite headwinds

In Europe, there is evidence of an emerging economic recovery supported by previous policy easing, a new credit cycle and expanding fiscal budgets in Germany and across Europe. However, the strength of this recovery remains uncertain, with headwinds from the reflexivity of recent euro strength, higher interest rates, rising energy prices and uncertainty over the timing of fiscal support. The latest Iran war is likely to have a more significant impact on the European economy, given its reliance on imported energy, and poses key upside risks to inflation. The European Central Bank has shifted to a more proactive stance, becoming more sensitive to inflation surprises and increasing the probability of rate hikes and a potential policy mistake. The higher level of uncertainty over the European growth outlook suggests more caution is warranted for European currencies, in our view, particularly given recent outperformance.

China’s economy moving in to reflation?

In China, easing measures have softened in the near term, with the credit impulse once more rolling over. The Chinese authorities continue to prioritise domestic consumption as a driver of growth. In particular, the “Special Action Plan” outlines a broad set of measures that will be implemented to support a transition away from the recent drivers of growth, namely high-value-added industry and exports, towards domestic consumption. The move was driven by the escalation in trade conflict, but China’s ability to materially ease is constrained by weak domestic confidence and elevated debt levels.

Recent growth data show some signs of a recovery in economic momentum from a weak base, with consumer confidence improving and the property market potentially nearing a bottom. The introduction of “anti-involution” policies and supportive base effects have supported a recovery in inflation, which has key implications for the rest of the world given the degree to which China has been an exporter of deflation over the last few years.

Reflation and resilience continue to support risk assets

As a result of our central investment roadmap, as discussed above, we continue to believe that risk assets will remain supported by easing fiscal and monetary conditions. Improving credit cycles and accelerating economic momentum suggest the potential for a broadening in market drivers, although geopolitical tensions are likely to continue to add to volatility.

We prefer areas of the market that will benefit from reflationary conditions, such as small caps and basic resources. In fixed income, valuations have notably reset in defensive government bonds in the near term, reflecting elevated inflation risks. As a result, the longer end of curves continues to offer attractive diversifying qualities, in our view.

In currency, while we continue to believe the medium-term path for the US dollar is weaker, the recovering economic backdrop and inflation risks create near-term upside risks to the currency, at a time when European peers are facing headwinds from the latest geopolitical events.

Defensive bonds

Bond markets have repriced notably amid potential inflation risks stemming from the Middle East conflict. Most central banks are now expected to hike interest rates multiple times. Overall, the degree to which central banks follow through on current pricing will ultimately depend on how core inflation, inflation expectations and wages react to the energy shock. While inflation risks have picked up amid underlying price pressures and the potential for a new demand cycle, the degree of pricing appears extreme at current levels, suggesting bond markets hold some value. We prefer to express exposure in areas where policy is already restrictive and likely to provide an offset to any upward shocks, such as the UK and Australia, and in areas where economic activity is already weak, such as Sweden.

Positive: UK, Sweden, Australia long end

Growth bonds & credit spreads

Developed market credit spreads have been volatile amid risk sentiment driven by the conflict in the Middle East, private credit concerns and AI disruption. After widening over the initial conflict, movement towards a resolution in recent weeks and a continued strong macroeconomic backdrop have supported a return of credit spreads to multi-year tightness. Issuance dynamics also look set to become a headwind as corporates, particularly in the technology sector, build up debt to fund investment. Given the limited upside, we do not believe current valuations compensate investors for taking credit risk and prefer to express growth risk through equity.

Overall, we remain selective in our approach to emerging market fixed income. The energy shock in the Middle East adds upside risks to inflation while being a headwind to growth, particularly in regions that are highly reliant on imported fuel and are already enacting fuel rationing. The extent to which the positive progress on inflation across most emerging markets is affected by this energy shock will be key to the extent to which bond yields can return to previous levels. We continue to focus exposure on areas where risk premia remain attractive and are supported by fundamentals, such as Brazil and South Africa.

Positive: South Africa and Brazil local currency

FX

While we continue to believe that the medium-term outlook for the US dollar is for weakness to persist, driven by easing policy conditions, a waning public impulse and dedollarisation flows, the near-term backdrop appears more supportive of US outperformance. Economic momentum in the US is accelerating, supported by the lagged effects of earlier policy easing and ongoing fiscal spending, while regions like Europe are facing additional headwinds from the reflexive effects of a stronger euro and the energy price shock in the Middle East. In a multi-asset portfolio context, the US dollar provides an attractive hedge against potential stagflationary risks. As a result, we have once again moved long US dollars within portfolios against European currencies.

Positive:  US dollar, Brazilian real, South African rand
Negative: Euro, Swiss franc

Equity

Within the equity allocation, we have become more positive on the US outlook, with the policy backdrop supportive and liquidity conditions expected to improve as the Federal Reserve resumes balance sheet expansion. This should support an ongoing broadening in growth momentum and benefit risk assets across regions.

The lagged feed-through of policy easing to date, improving credit dynamics and the potential front-loading of fiscal spending in 2026 are expected to support a broadening in US growth and market drivers. This should benefit areas of the equity market that have lagged, particularly US small caps, where earnings momentum is improving, as well as cyclical sectors such as European basic resources and European banks.

Within emerging markets, Chinese authorities are actively easing policy conditions to encourage growth and stabilise the economic outlook. We expect this dynamic to support linked equity markets, though we remain neutral on the region given the limited valuation asymmetry.

Positive: Stoxx Basic Resources, Russell 2000, European banks

Commodities

Broad commodity exposure remains attractive in a multi-asset portfolio context in our view, as previous policy easing continues to feed supporting demand, raising the risk of a reflationary scenario. The conflict in the Middle East has exacerbated the inflationary trends that were already emerging on the back of this demand cycle, and while it poses growth risks, we expect them to be limited outside of a further material escalation, given the offsetting trends already at play.

From a specific commodity perspective, precious metals remain well supported. Gold continues to benefit from geopolitical uncertainty. Producers are generating record margins and strong cash flows. Silver and the platinum group metals also remain constructive – wider margins look durable even after a strong run.

In energy, the Middle East conflict is materially disrupting Strait of Hormuz flows, which normally handle around 20% of global oil and LNG supply. Rerouting capacity and strategic petroleum reserve (SPR) releases only partially offset the deficit, making the timing of the ceasefire critical. The three structural overhangs on oil – stalling US shale growth, normalising OPEC spare capacity, and disappointing EV adoption – were already laying the foundations for a more constructive outlook beyond the November midterms; the conflict may accelerate that timeline. In base metals, aluminium is particularly exposed given the inflexibility of smelter restarts, and we expect post-conflict strategic stockpiling to provide ongoing support for prices across critical metals. In agriculture, the region’s outsized role in nitrogen fertiliser exports poses a meaningful risk to crop yields, especially corn and maize, with India, Southeast Asia, East Africa and South America most vulnerable if disruption extends into second-half planting cycles.