Aberdeen, the specialist asset manager, has issued its latest quarterly ‘House View’ on the macro-economy and investment outlook.
This outlook is conditioned on the continued “late-cycle” macro environment, in which risk assets and carry strategies can perform but where there are considerable economic and geopolitical risks.
Peter Branner, Chief Investment Officer, at Aberdeen says: “We have based our outlook on the continued “late-cycle” macro environment in which the US economy is slowing but avoids recession and policy rates are cut. There’s a dampened nominal growth environment in China but ongoing policy support and the increasing emergence of “AI winners” in its corporate sector. Meanwhile, we expect more rate cuts across Emerging Markets as the focus shifts from containing inflation to supporting growth and the US Federal Reserve resumes easing.
“There are considerable economic and geopolitical risks to consider. This includes a deterioration in the US labour market that could morph into a broader downturn and recession amid “stall speed” dynamics. Although a mini-cyclical pickup, now that peak tariff uncertainty appears to have passed, is also possible. Political interference at the Federal Reserve could de-anchor inflation expectations and eventually trigger a bond market rout. Given the extent of political capital the Trump administration has devoted to reshaping the Federal Reserve, the House View is that the risk of fiscal dominance has risen. This is already being partly reflected in a steeper yield curve and shifting correlations between inflation expectations and commodity prices. Alternatively, AI-driven productivity growth could see a sustained supply-side expansion in coming years.”
Paul Diggle, Chief Economist, at Aberdeen added; “Taking all this into account, we have upgraded our view on Emerging Markets equities and overall remain positive on corporate risk. We are positive on short duration bonds as a diversifier but think yield curves can continue to steepen across countries. We retain our positive view on infrastructure and direct property and expect the dollar to depreciate.”
Emerging Market Equities
The Aberdeen House View expects Chinese and broader emerging market (EM) equities to continue to perform well and has upgraded its conviction in the positive signal for EM equities. EM equity valuations are still more attractive than those in developed markets (DM), and a weaker dollar should support EM equity earnings. The Chinese equity market is becoming more of an AI “story”, with Chinese tech firms’ capital intensity rising, potentially following the trajectory of large US firms. To the extent that the Chinese macro picture is a driver of equity performance, it has been the additional policy stimulus, rather than the growth slowdown, which has mattered.
In addition, the initial tariff-related shock to the Chinese economy has been smaller than might have been expected, because of the strength of non-US export markets. However, transhipment tariffs and anti-dumping measures mean this offset will weaken in time. And there are headwinds to Chinese activity from falling house prices and weak consumer sentiment. So, a further growth slowdown is likely still coming. The anti-involution campaign may help reduce excess capacity in certain sectors such as solar panels and electric vehicles. And financial conditions continue to be loosened. But the bigger picture is that policy looks insufficient to materially boost nominal growth.
Emerging Market Debt
Aberdeen also remains modestly positive on emerging market (EM) debt markets. EM sovereign and corporate credit fundamentals remain broadly sound (with Indonesia a notable exception), and the rate cutting cycle is likely to continue, as the focus shifts from containing inflation to supporting growth, and the Fed resumes easing. Market technicals are supportive, after a period of low issuance and amid strong demand for non-dollar assets. Aberdeen notes EM spreads have narrowed after a period of strong performance, with EM IG spreads at their tightest since 2007 and high yield spreads at their tightest since 2018. But carry in EM debt remains attractive.
Duration
The signal on duration is modestly positive, but there is an expectation of curve steepening in Aberdeen’s House View. The short end of bond curves can price in more rate cuts given the risks around stall speed, the only one-time price level shock of tariffs, and with a more dovish Fed chair incoming. A core overweight in duration in a late-cycle environment during policy normalisation offers conditional diversification given these risks. The House View’s benchmark to measure the duration signal is a global bond index with a maturity of just over 6 years.
However, Aberdeen expects bond yield curves to remain steep and indeed steepen further, especially beyond the 10-year point. Debt and deficit levels are high across the DM economies, with especially acute fiscal pressures in the US, UK, France, and Japan. Political resolve for fiscal consolidation is lacking, while there are fewer natural buyers at the long end as central banks reduce the size of their balance sheets and many pension and life funds are in surplus.
US Dollar
Aberdeen continues to send a modestly negative signal on the US dollar. This position is based on an expectation of Fed rate easing as the US economy has slowed, which will close the rate differential with many other economies, and the growing risks around both the US cycle and the institutional environment. The dollar, and many dollar-denominated assets, are expensive on most valuation metrics Aberdeen notes. However, the dollar is already a consensus short among many market participants, which may limit the extent of underperformance.
Real Estate
Turning to private markets, Aberdeen remains modestly positive on global direct real estate. After the deep post-pandemic downturn, the real estate returns cycle is inflecting higher, albeit gradually given the economic and geopolitical uncertainties. There are fewer distressed assets, with retail and even office sectors showing positive returns as prior structural issues fade, while data centres are performing well and are a growing part of investor benchmarks.
Aberdeen highlights investor sentiment is becoming more positive, with global flows up year-on-year and more capital ready to be deployed. Liquidity is improving, and debt markets are open. Spreads are most attractive in Europe, but with some catch up in the UK and US needed before the House View preference can be upgraded further.
Infrastructure
Aberdeen retains its positive signal on infrastructure. However, it acknowledges tariffs and ongoing volatility in the energy market may make some subsectors challenging for infrastructure investors, especially those with strong GDP linkage such as transportation and merchant energy projects. So stresses a focus on deal quality remains essential.
The House View also acknowledges the overall capital raising environment is very strong as interest rates move lower, global infrastructure “dry powder” is high and the supportive structural drivers of infrastructure remain very much in place. These include debt (stretched public sector balance sheets require a crowding-in of private capital), digitalisation (growth in AI and data exchange is increasing the need for data centres and power infrastructure, while the importance of sophisticated cybersecurity is also rising) and decarbonisation (major grid upgrades are required, the move to sustainable transportation supports the build-out of public transport systems, while increasing focus on energy security supports domestic production facilities).
