Rhythmic Reasoning_Highlights_SWM_EN - Flipbook - Page 13
G L O B A L A S S E T A L L O C AT I O N
Diversification can help offset risks related to policy uncertainty,
elevated valuations, and high index concentration.
Asset class positioning
After reeling from tariff-related headlines in the first few months of the year, global
equity markets have notched record highs. The improved sentiment has been driven
by better news on the trade policy front and solid earnings results, a trend that is
expected to continue into 2026. Economic conditions have also been solid with
consensus year-ahead recession probabilities across the major economies being
relatively low. Central banks, with the exception of the BoJ, have also continued to
lower monetary policy rates.
Volatility could pick up if trade negotiations with key players like China and USMCA
members go south. Businesses are attributing higher input costs to tariffs but have so
far had difficulty passing these costs to consumers amid weak demand and
competitive markets, pressuring corporate profit margins and underscoring the need
to hold high-quality companies with pricing power.
Such high-quality companies are often found in growth-oriented sectors that are wellrepresented in the U.S., though this market is not without risks, such as unpredictable
government policy, elevated valuations, and high index concentration. As such, we
have decided to keep our U.S. overweight relatively modest.
Unlike the U.S., domestic markets like Canada and Mexico are heavily weighted
toward cyclical industries that are relatively more sensitive to commodity price
swings. Such companies tend to be “price takers,” making them more prone to tariff
shocks. This is not to say that investors should shun their domestic markets. Canada,
for instance, boasts several high quality companies across sectors like financials and
utilities. The country has also signalled a shift to more proactive fiscal policy, which
may provide support for growth, with more details to be revealed in the upcoming
Federal budget.
We maintain a positive view of international equities. Early signs of fiscal expansion in
Germany appear promising and may provide further tailwinds to growth in the
quarters ahead and possibly help offset political turmoil out in France.
In fixed income, we maintain our allocation to high-quality assets, including sovereign
debt and investment-grade corporate credit. High-quality fixed income can serve as a
safe harbour for investors, acting as a ballast in portfolios should economic conditions
deteriorate and/or market volatility ramp back up. Consistent with our preference for
quality, we remain underweight high yield.
UW
N
OW
Δ
Domestic
=
U.S.
=
International
=
Sovereign
=
IG
=
HY
=
Asset class
Equities
Fixed income
Capital market expectations
Exp. return
Hist. return
Volatility
Canada
10.0%
7.3%
19.5%
U.S.
9.5%
11.0%
15.1%
International
9.2%
6.2%
16.8%
Sovereign
3.2%
3.1%
3.4%
IG
3.3%
3.4%
3.4%
HY
6.0%
6.9%
9.1%
Asset class
Equities
Fixed income
