House View Q3 2025: Fear of going in?

• We expect the yield curve to steepen, especially in the US, because of economic growth risks and concerns of a deteriorating fiscal outlook. Bond market volatility could remain high, so we prefer to trade tactically around our core views in yield curves and our long headline duration bias.
• We see value in long 30-year Gilts versus US Treasuries. We think the macro and policy backdrop also favours peripheral euro sovereign spreads over core markets.
• In investment grade credit, pricing is modestly rich, but corporate fundamentals remain strong and technicals are supportive. We retain a moderate overweight with a focus on higher quality and non-cyclical names.
• We think high yield spreads offer limited compensation for any step up in defaults. Rather than chase the market, we focus on security selection and stay slightly underweight.
• In emerging markets, we favour local currency bonds, especially where central banks have room to cut rates, such as Indonesia. We also like South African local rates.
• We think the US dollar faces cyclical and structural headwinds and favour short positions versus the South Korean won, Singapore dollar and Brazilian real, among others.

• As multi asset investors, we are cautiously optimistic on equities, helped by supportive momentum, but with strong regional preferences. While equities could continue to profit from technical support in the short term, we expect US equities to reach a secular top, while other markets may outperform. Our pick is euro zone equities, aided by improving sentiment, supportive central bank policy, and growing investor inflows.
• The euro zone is also our preference for sovereign bonds due to soft inflation data and safe-haven flows, though our conviction has moderated. We are more cautious on US Treasuries due to rising fiscal concerns and weak auctions. EM debt should profit increasingly from past fiscal and monetary discipline.
• US dollar fragility is still the dominant theme in currency markets. We stay positive on the euro and the Japanese yen, benefiting from dollar weakness and supportive fundamentals. The US dollar's outlook is clouded by challenges to US exceptionalism and the rising debt burden overseas.
• Gold continues to shine amid an uncertain global outlook, bolstered by strong buying from central banks. While geopolitical tensions could lead to higher oil prices in the short term, crude remains under pressure as concerns about excessive supply weigh on prices. Copper stays range-bound but additional tariffs on the metal could push up prices.

Current opportunities

• Relative to public markets, private markets performance has proven more stable (less volatile) in the past periods of market turmoil, showcasing how the addition of private markets in the asset allocation can help stabilise a portfolio in such times.
• Diversification is essential. Investors in private credit or infrastructure can think about diversification in two ways: i) across vintages – the year when a fund makes its first investment – to decrease market timing risk, and ii) across geographies to help avoid excessive exposure to one region.
• While the growth outlook is uncertain, adding defensive assets such as floating-rate private debt and infrastructure equity should help safeguard portfolios if inflation is kept under control.
• If inflation rises significantly, real assets and credit (where revenues are often inflation-linked) are expected to benefit. The inflation protection potential of infrastructure equity was demonstrated in 2022 when inflation spiked (see chart).
• Secondaries (stakes in existing credit funds) continue to evolve as a compelling defensive play amid overall uncertainty, lack of distributions in the broader market, and drawdowns in public markets.
• Private equity activity is still on the sidelines, and we expect a rebound once liquidity, stability and a more positive economic outlook materialise.
• Fast-growing semi-liquid private market products can be a good way to tap into private markets – especially for investors seeking an initial foothold – as they offer a fast build-up. They can also help existing investors fine-tune their allocation.

Market performance update: asset class snapshot (EUR)

In euro terms, private markets asset classes delivered double-digit returns in 2024, also boosted by a 7% appreciation of the US dollar over the year. Long-term upside and downside volatility has consistently been lower than equities, with strong outperformance in the 2022 equity downturn.

Source: Allianz Global Investors, MSCI Private Capital and Bloomberg: pooled net IRRs across all vintages for private markets and total returns for equities, all as of 31 December 2024, in EUR. This is for illustrative purposes only and no guarantee of expected results or indicative of future allocation. Past performance does not predict future returns.