- Economic security is becoming an increasingly important determinant of macro resilience. Our composite framework combines national and resource security, trade and supply-chain resilience and food security. The results highlight a clear pecking order: the US and China enter this era from positions of relative strength, while Europe and Japan remain more exposed to external dependencies and geopolitical disruption.
- Resilience is no longer simply a defensive characteristic; it increasingly shapes economic outcomes. Economies with stronger resource access, larger strategic buffers, and more resilient supply chains are likely to experience shallower growth slowdowns, lower inflation pass-through, and greater policy flexibility following external shocks. By contrast, more dependent economies face greater vulnerability to supply disruptions, imported inflation, and deteriorating terms of trade.
- The same geopolitical shock is therefore unlikely to produce the same economic outcome across regions. Recent energy, trade, and supply-chain disruptions have demonstrated that countries with stronger buffers (notably the US and China) can absorb shocks and recover more quickly, while more exposed economies (such as Europe and Japan) face longer adjustment periods. We believe geopolitical fragmentation is becoming a structural source of divergence in growth, inflation, and market performance.
- In the near term, investors may continue to reward economies perceived as geopolitical safe havens. The US appears particularly well positioned given its relative strength across energy security, financial market depth, and reserve currency status.
- Longer term, however, some of the most compelling opportunities may emerge in regions currently scoring lower on resilience. Europe and Japan are already responding through industrial policy, supply-chain diversification, defence spending, energy investment, and strategic reshoring initiatives. As these adjustment cycles gather momentum, investors may find opportunities in the sectors and companies positioned to benefit from the rebuilding of economic security.
Our base case is a reflationary backdrop that supports risk assets, led by resilient growth and continued AI momentum, despite higher interest rates. The distribution of outcomes is unusually wide, ranging from a prolonged inflation drag on growth and multiples, to a faster-than-expected disinflation that unlocks small-cap outperformance and a fixed income rally.
Base Case Scenario
Global growth remains resilient and AI momentum continues to build, even as central banks maintain a prudent stance in the face of elevated inflation.
Key Implications
The current macro environment has the hallmarks of a reflation regime—resilient growth, persistent inflation, and accommodative fiscal policy. In this context, we remain constructive on risk assets and neutral on duration. AI investment momentum should persist, with scope for upward capex revisions that benefit US and EM equities in particular. Market gains are likely to stay earnings-led, though a more hawkish central bank stance could compress valuations, capping upside in H2 and delaying a broader rotation beyond mega-cap leadership. In fixed income, yield curves remain under pressure from both ends: cautious central banks are anchoring the front end, while loose fiscal policy and solid growth keep long-end yields elevated.
Stickier Inflation Scenario
Middle East energy-crisis spillovers prove larger than expected, driving more persistent inflation, weaker global growth and more aggressive monetary tightening.
Key Implications
Traditional hedges lose their edge as inflation stays elevated, growth slows, and rates rise, exposing portfolios to further drawdowns. In this environment, we would favor short-duration fixed income to reduce interest rate sensitivity, alongside high-dividend equities for their carry characteristics. Within risk assets, corporate credit may absorb the shock better than equities, supported by its income component. Should the monetary policy response prove global in nature, short-duration equity markets such as Europe and Japan are likely to outperform. In rates, yield curves should bear-flatten further, with front-end yields rising more than the long end as inflation risk reprices higher.
Rapid Disinflation Scenario
Geopolitical de-escalation and increased energy supply push energy prices meaningfully lower, while limited second-round inflation effects allow central banks to turn more dovish in H2 with the Fed resuming rate cuts at the end of the year.
Key Implications
Renewed dollar weakness tilts the playing field toward global ex-US equities and small caps. Core fixed income also benefits as rate pressure eases. Yield curves bull-steepen—the front-end rallies on inflation relief, but the long-end holds up, anchored by fiscal expansion and above-trend growth.
