Seize Alternative Opportunities
The stock–bond correlation keeps swinging back into positive territory, exposing the limitations of traditional diversification methods, like 60/40 portfolios, especially at times of heightened inflation risk. As debt sustainability comes into question and geopolitical uncertainty remains high, we think that bonds and equities might remain positively correlated.
Key Implications
We believe investors should consider liquid alternatives to potentially achieve better downside mitigation and differentiated market exposure. Infrastructure and private credit may also provide investors with diversified exposure and mitigation against inflation risk.
Rethink Your $ Exposure
The US Dollar has been roughly flat over the last few months, but we do expect it to resume its fall before long, as the Fed cuts rates, the US economy proves unexceptional and hedging costs prompt some marginal redirection of flows to domestic markets.
Key Implications
We are most positive on the Euro—as the German fiscal stimulus may support growth convergence and the policies of the Trump administration should moderate capital inflows into the US—and the Yen, given low valuations and shrinking interest rate differentials between Japan and the US.
OUTLOOK
Riding the Capex Revival Wave
Despite recent performance, we think that there is room for European equities to rally further on the back of both favorable valuations and improving fundamentals. For a start, we expect stronger EPS growth in 2026, supported by structural tailwinds, including fiscal support, infrastructure investment and a notable ramp-up in private sector capital expenditure. Indeed, the capex-to-sales ratio for Europe ex-Financials has now climbed to a 10-year high, reflecting a shift in how corporates deploy cash. Much of this investment is flowing into sectors around the energy transition, defense and AI. Continued fiscal execution, industrial recovery, policy reform and potential geopolitical tailwinds will be key in unlocking the next leg of the rally, but we believe that these trends could contribute meaningfully to improving Europe’s long-term competitiveness and ROE. While select US equity sectors, notably tech, remain compelling, we believe that European equities now represent a good alternative to broader US equity exposure and at a still-affordable “price”. The PEG ratio spread between the S&P500 and STOXX 600 is near its widest outside the Covid shock, underscoring a still-pronounced valuation gap even after adjusting for medium-term forward earnings growth.
Turning Tailwinds into Tactical Advantage
Within Europe, while a stronger euro and lower oil prices could weigh on large-cap exporters, we expect domestically oriented names to continue showing resilience. In particular, valuations and forward EPS growth appear compelling in small caps, Financials, Utilities, Telecoms and Materials. We believe that these pockets also stand to benefit from resilient dividends, capex incentives and domestic demand. Selectivity remains critical, but with M&A activity potentially re-accelerating going into 2026 and the above-mentioned tailwinds, we believe that European equities continue to be compelling.
SOLUTIONS
