James Burns

We remain positive on the outlook for equity markets which have continued to rise in GBP terms. The have been led by U.S. equities and the technology sector, where strong earnings and AI-driven momentum have buoyed investor sentiment. We do however remain mindful of emerging inflationary pressures and signs of labour market weakness which have contributed to expectations of further easing by central banks, particularly the Federal Reserve. Despite these crosscurrents, risk assets have held up well, suggesting investors remain focused on corporate fundamentals and the prospect of looser monetary policy.

Valuations have become more expensive across regions, while profit margins and EPS growth improved in the UK and US. On a relative valuation basis, Europe ex-UK and Japan remain attractive compared to the US. Relative earnings and margin signals also suggest that Europe ex-UK and emerging markets are more appealing than both the UK and Japan. Within our regional equity allocation, we maintain a large overweight to the UK and a small underweight to Europe although we recently reduced our overweight to the UK and reallocated to Europe ex-UK.

We remain underweight fixed income overall. Higher relative sovereign yields in the UK reflect sticky inflation (and concerns around second-round effects), a higher base rate, and supply/demand technicals—including QT and structurally changed long-end pension demand.

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