Allianz 2025 Q2’s House View: Vibe shift

Heads spinning, markets rotating

• Early 2025 has brought a switch in sentiment. Facing stark geopolitical realities, Europe is adjusting fiscal policy in a way that should drive structural growth. This pivot – a major moment for economics and politics – has sparked a broad-based European rally.
• We think the rotation into European markets has, so far, barely made a dent in large, established US overweight positions and it is not too late to participate.
• In the US, tariffs and uncertainty about the economy and government policy are weighing on growth. Some actions of the new administration could undermine the US as a safe haven.
• Risks in this environment include higher US inflation, slowing growth momentum globally, and the potential for a full-blown and protracted trade war. But we consider it a compelling period for active management.
• We are cautiously optimistic on select equity markets in an environment where "air pockets" of temporary turbulence are likely. Well-anchored portfolios across geographies are key. Consider a long Europe position as well as opportunities in China and India.
• This shift in sentiment has implications for sovereign bonds. Our highest conviction is in UK Gilts. Overall, we are slightly long duration in the UK and euro area. We think investment grade spreads are supported by carry and momentum.

Asset class convictions

• Overall, we have a constructive outlook on equities while being tactical amid the risk of "air pockets". We think the rally in European equities has further to go but, given the market volatility and uncertainty, we would also look to other global markets as part of well-anchored portfolios across geographies.
• The reassertion of “European sovereignty” – and increased spending commitments – could boost several sectors. These will likely include cybersecurity and AI as well as defence.
• European investors are currently underweight construction. But rapid growth in global data centres is structurally positive for the sector; it could also benefit from any post-ceasefire reconstruction in Ukraine.
• With a USD 4 trillion market capitalisation, India offers a high sectoral diversification compared with other emerging markets. Valuations may offer a compelling margin of safety.
• We think China is attractively valued and getting noticed for its technology focus (eg, embodied AI and humanoid robots). Given the potentially weaker trade outlook for China this year, the government is set to promote consumption that should support growth.

• We remain selectively constructive on certain equity markets as headwinds grow and tariffs weigh on market sentiment. Having cut our US exposure, European equities are our top pick, buoyed by momentum, attractive valuations, increased fiscal spending and improving sentiment.
• Weaker inflation in Europe than in the US leads us to favour European government bonds over US Treasuries. Although the scale of planned fiscal packages is still be finalised, we expect higher yields to persist in an environment of increased volatility and a decoupling of major yield curves.
• Our preferred currency is the Japanese yen. We think conditions for the currency are supported by the Bank of Japan’s policy stance – it is late in its cycle of interest rate rises. The yen could regain its safe haven status, especially as Japanese local bonds become increasingly attractive.
• In commodities, gold remains our highest conviction call, driven by robust momentum and its role as a hedge against geopolitical risks. In our view, gold remains a useful diversifier in multi-asset portfolios.

• We expect the yield curve to steepen in Europe, reflecting big defence-related spending plans in Germany and elsewhere that will take time to implement. Across the Atlantic, fears of a slowdown also point to US yield curve steepening. In this environment, we prefer to trade tactically around structural positions.
• The outlook for Gilts is promising based on valuations and market expectations of central bank policy. In the UK, unlike in the euro area or Canada, likely future rate cuts are not fully priced in. On recent Gilts outperformance we took partial profit on this theme.
• Consider going long on the Japanese yen. The Bank of Japan is under ongoing pressure to raise rates to more “normal” levels to tackle inflation. For that reason, expect Japan’s yield curve to flatten.
• Don’t chase beta in credit markets. With interest rate volatility expected, the environment calls for a selective approach involving bottom-up and single-credit analysis.
• Emerging markets are showing resilience in the face of market volatility, indicating value in a selective approach to emerging market debt.