Allocation Views: From Goldilocks to geopolitics—repositioning for an energy shock

Summary and themes

Our approach to risk remains highly tactical moving into April, as conflict in the Middle East continues to drive markets.

Disruption of energy supplies is the main reason for tension in financial markets, and Iran retains the ability to impede energy production and transit regardless of US military dominance.

A complete resolution of hostilities is unlikely, in our view, despite the fragile ceasefire. As a result, we believe energy prices will remain elevated, feeding into inflation expectations, eroding private sector confidence and slowing economic growth.

Rising inflation makes it harder for central banks to stimulate sluggish economies, feeding the stagflation¹ narrative and supporting a defensive approach to asset allocation.

Against this background, we have neutralized our cross-asset positioning in this month’s Allocation Views but still hold some risk within our intra-asset allocations.

Macro themes

Growth steady, but weakening

• Leading economic indicators have weakened somewhat, as business activity is crimped by higher input costs and waning confidence.
• Corporate sentiment appears strong, as evidenced by positive earnings revisions and guidance for calendar year 2026.
• The US economy has proven relatively robust, while labor market data is disparate but remains stable.

Persistent inflation pressures

• Inflation pressures were already increasing prior to the energy price shock, with most prints above central bank targets.
• Elevated energy prices may diminish real incomes and suppress demand, contributing to stagflationary conditions within major economies.
• Tariffs have been absorbed by both US consumer prices and business margins. As a result, core goods inflation remains above trend, albeit pressures may have peaked.

Policy bifurcation

• There is an increasing bifurcation between supportive fiscal policy and restrictive monetary policy as markets assess the energy price shock.
• The Middle East conflict has catalyzed a recalibration of policy expectations, with multiple hikes now priced in for most regions.
• Fiscal policy in major economies is generally supportive of growth. US tax refunds will likely offset tariff headwinds, while energy support packages could also prove influential.
   

Portfolio positioning themes

Tactically neutral

• Forecasting geopolitics is difficult and always requires a degree of humility. As a result, we strive to curtail the tracking error in our portfolios and reduce equity risk, as we await greater clarity.
• The macro backdrop has become more challenging, as inflation limits expectations for stimulative monetary policy.
• Sentiment and positioning have retreated to more attractive levels, supporting risk assets, while corporate fundamentals are relatively supportive.
   

Rotating toward core

• We have reassessed our US equity positioning, adding to core equities as the conditions for market breadth have weakened, amid a less attractive macro backdrop.
• We have trimmed our overweight allocation to Japanese and emerging market (EM) equities, given greater sensitivity to energy supply constraints caused by the Middle East conflict.
• We coordinate those changes with a reduction in underweight exposure to European and UK equities, as we strive to reduce tracking error.
   

Neutralizing government bonds

• We expect demand destruction to play a greater role in monetary policy decisions than inflation.
• Resilient US growth and sticky inflation make Federal Reserve (Fed) easing less likely, in our view. As a result, we stay underweight US duration.
• We have decreased exposure to EM local-currency bonds, taking a more cautious view of debt in this region amid ongoing uncertainty and US dollar strength.