Global macroeconomic foundations are shifting under the weight of persistent geopolitical friction. Middle East supply chain disruptions have prompted a formal revision of global economic forecasts. The data points to a clear structural slowdown, pushing the global economy into a mild stagflationary environment.
While a full-scale recession is expected to be avoided, the macroeconomic trajectory has cooled. Global GDP forecasts for 2026 have been downgraded from 2.9% to 2.5%, while global inflation expectations have been bumped up significantly from 2.4% to 3.3%.
Equities: Chasing Earnings Momentum and AI Value
Despite a stagflationary environment justifying lower valuation multiples, corporate earnings momentum remains resiliently positive. This underlying strength keeps Schroders structurally overweight on global equities, with a sharp focus on targeted sectors and regions:
- Resource and Energy Hedges: UK and Canadian equity markets are highly favored due to their heavy index exposure to energy and raw materials, serving as a natural hedge against supply chain shocks.
- US & Taiwanese Tech: Strategic exposure to global hardware and semiconductor supply chains remains a core portfolio pillar.
- Chinese AI Undercurrents: Chinese technology platforms are emerging as highly attractive plays. These firms are capturing significant market share in downstream artificial intelligence applications and digital services while maintaining vastly less stretched valuations than Western peers.
Fixed Income: Fleeing US Debt for Selective Sovereigns
The fixed-income landscape has been upended by a sharp spike in bond yields, driven by investors pricing in stickier inflation. While a neutral stance is maintained on government bonds broadly, significant geographic divergence exists.
A strict negative outlook remains on US government bonds due to heightened domestic inflation risks and an unappealing yield profile relative to cash. Instead, capital is being rotated into select sovereign alternatives:
- Italian Government Bonds: Offering highly attractive yield premiums.
- Australian Government Bonds: Insulated by a proactive, orthodox central bank monetary policy.
- Emerging Market Debt: Backed by superior localized inflation trends and conservative fiscal frameworks.
Conversely, US investment-grade corporate debt is being avoided, as heavy corporate issuance and rising stagflationary risks compress the asset class's risk-reward ratio.
Commodities: Gold Outshines Sovereign Debt
The crude oil market remains highly binary, dictated almost entirely by unfolding geopolitical headlines. Amid this volatility, a broadly positive view on commodities is sustained.
Crucially, gold continues to be favored as the premier defensive asset class. With long-term global debt sustainability under immense scrutiny, physical gold presents a far more reliable safe-haven profile than traditional government bonds.