Markets faced balancing priorities in the last two months, with tariffs, geopolitical uncertainty, and political change changing the calculus for many investors. In this update, Charles Younes, Deputy Chief Investment Officer at FE fundinfo, analyses how markets have shifted in the last two months, how FE fundinfo’s investment strategy has shifted, and forecasts the future direction for investors in 2025.
Fund Allocation for FE Investments
We have recently reviewed our updated scenario probabilities. While downside risks have moderated somewhat following Trump’s U-turn on trade tariffs, tail risks remain elevated. We still expect a volatile path over the next nine months, and believe any disinflation or soft landing scenario is unlikely to be “immaculate.”
Our modelling for the US economy predicts that sticky or moderate inflation is more likely today than it was two months ago:
- Likelihood of moderate inflation – at 65% (Up from 55% in April)
- Likelihood of sticky inflation – at 30% (up from 20% in April)
- Chance of inflation dropping at just 5% (down from 20% in April)
- The most likely growth scenario now is below trend (40%) with a mild recession or hard landing less likely (20% and 5% respectively)
1. Asset Allocation: Defensive Tilt
We have maintained a defensive positioning in portfolios, with a further reduction in our allocation to equities—particularly US equities.
The key shift in our view is a growing conviction that cash and short-duration bonds remain the most effective assets for downside protection. This is driven by both fundamentals (inflation likely peaking over the summer; impact of renewed tariffs) and sentiment, as risk premia have increased across both US Treasuries and UK Gilts.
Put simply, we don’t believe investors are being sufficiently compensated for taking on additional duration risk at this stage. We are more comfortable locking in yields available at the short end of the curve.
(source FE Investments)
2. Real Assets: A Rising Role
While diversification benefits from government bonds—typically viewed as safe havens—have improved, we also see increased value in real assets (infrastructure, REITs, commodities, and natural resource equities). These asset classes offer additional diversification, particularly in a stagflationary regime, which we view as a plausible risk scenario in the months ahead.
With geopolitical tensions high and valuations (with the exception of gold) generally reasonable, real assets now play a more central role in our diversified strategy.
3. Regional Allocation: US vs. Emerging Markets
We continue to maintain a cautious stance on US equities. Elevated valuations and macro uncertainty temper our enthusiasm, a trend only accelerated by the recent uptick in speculation around Powell’s successor at the Fed and further fiscal analysis on the cost of the budget bill. This is particularly compared to emerging market equities, where we see a more attractive risk-reward balance.
