Constructive Amid Uncertainty

As an investment team, we see risks for markets on the horizon. These are likely to drive further volatility as the narrative ebbs and flows. However, looking beyond the headlines, we continue to see further upside for growth assets. We believe that AI capital expenditure, productivity gains, and excessive fiscal spending will continue to support economic activity, underpinning strong consumer spending and corporate earnings.

Many companies have materially increased AI-related investment in recent years. It is true that the returns on this capital expenditure may take time to materialise. Building and operating AI systems requires enormous investment and the path to monetisation is uncertain and bumpy. Regardless, recent corporate earnings releases have been impressive and dampened these concerns. Fears that automation will lead to widespread job losses have also been raised but, so far, this has not materialised. The latest AI models have leapt forward in terms of reasoning and, as this improvement continues, significant economic benefit and revenue growth is expected. There is growing evidence that AI is improving productivity across a range of industries. Repetitive admin tasks can be automated, AI chatbots are handling customer queries, faster medical diagnosis can be made with AI supporting pattern recognition, accounting and reporting can be automated, risk models improved – the list goes on. In short, while adoption remains uneven, the potential for productivity gains is powerful and adoption is expected to keep broadening and ultimately benefit more companies and sectors.

The cost of financing and its availability are of major importance to the buildout and maintenance of AI infrastructure. Recent changes to US bank regulations have enabled more lending and the yield curve has steepened over the last few years (whereby long-dated bond yields have increased more than short rates), this bolsters bank profitability and motivates lending. This is helping to fuel business investment and, therefore, supporting jobs and corporate earnings. Additionally, South Korean trade data – which is a bellwether for global activity because its economy is highly exposed to global manufacturing, especially for AI – shows strong growth in exports and supports our thesis of widening adoption.

As has been the case for some time, government spending remains high. This is a widespread pattern across countries whereby governments are spending considerably more than they are recouping in tax revenue.

Using the IMF’s April 2026 Fiscal Monitor, 2026 forecasts are for sizeable budget deficits (whereby governments spend more than they receive in taxes) in the US, UK and Europe at approximately 7.5%, 4% and 3% of GDP respectively. Large and persistent deficits are driven partially by increases in defence spending, interest costs, and healthcare bills. In developed markets ageing populations create a high demand for healthcare services, and geopolitical tensions underpin the need for defence spending. Moreover, in the UK, welfare costs have ballooned as unemployment rises and more working-age adults are economically inactive. Interest costs have become a much more significant proportion of government spending in recent years as government bond yields have risen alongside interest rates. This increases the cost of new borrowing and, importantly, also raises the cost of existing debt over time: when older and lower-yielding bonds mature, governments must refinance them by issuing new bonds at today’s higher yields, gradually pushing up the overall interest bill. Given so many upward pressures on budgets, this situation seems likely to continue for many years. Despite the negatives, ultimately government spending does provide stimulus which is supportive for jobs, consumer budgets and earnings.

Finally, we expect central banks to remain supportive over the medium term. Our narrative is currently being challenged as inflation has increased over recent months due to higher energy prices following disruption to oil shipments through the Strait of Hormuz. The conflict between the US and Iran seems to have reached a resolution, and whilst oil prices have fallen sharply from recent highs, we must be cognisant that the resolution is fragile and there are risks that disruption and elevated energy prices return. Above target inflation presents risks that central banks shift towards higher interest rates and the new Federal Reserve chair, Kevin Warsh, has stated his commitment to the inflation target.

Despite this, we do not expect that central banks will pursue significant rate hikes. As well as the recent reversal in oil, in our view, central banks will take comfort from declining wage growth over the last year which reduces the risk that the energy price spike will have a lasting effect on inflation. In addition, Kevin Warsh has previously discussed his belief that AI developments mean we are in the early innings of a structural decline in prices. Whether he can sufficiently influence the committee to agree with this view is unclear and this uncertainty brings the potential for volatility in asset prices over the coming months. Nonetheless, from a long-term perspective, central banks are constrained by the high debt levels we have discussed earlier. It is unpalatable for governments to face even greater costs of servicing their very large debt piles. The US government has $39 trillion in outstanding debt and approximately $10 trillion needs to be refinanced with bond sales in 2026 alone. The most acceptable path for authorities is to avoid hiking rates whilst letting inflation run a little higher, reducing the real (i.e. inflation adjusted) value of government debt over time.

We have a tactical overweight in global ex-US equities (primarily Europe, emerging markets and Japan) – regions we expect can benefit from equity market breadth and where we also expect tailwinds from growth friendly government policies. Specifically, we expect Europe to benefit from increasing government spending in areas such as defence and infrastructure. Relatively low valuations in emerging markets are expected to underpin gains as the technology sector propels earnings growth in the region. Meanwhile, in Japan, corporate reforms and a new PM that supports government spending presents a favourable environment for stock investors. Lastly, we hold a strategic overweight to UK stocks as the sector mix – which includes a high proportion of consumer staples, financials and materials – offers diversification within a global portfolio.

We believe that the current environment is characterised by fragile geopolitical relationships and huge government debt piles which underpin inflation and, therefore, we cannot reliably depend on government bonds for portfolio diversification. Nonetheless, we believe there are several attractive areas within the fixed income universe with short-dated bonds offering a stable return stream. We need to be granular and look to security selection as critical to returns. We are underweight sovereign bonds, but we do expect attractive returns from floating rate and short-dated corporate as well as inflation-linked bonds. We prefer to be active because ongoing fluctuations in the market narrative provides ample opportunities to enhance returns.

Real assets are a strategic allocation across our multi-asset portfolios, and we hold both gold and broad commodities. Over the long-term, gold has exhibited a low correlation to equities and bonds and has historically proved itself as a safe-haven asset during both growth and inflation shocks. Although gold fell sharply in March with equities, as some central banks slowed their purchases of precious metal reserves to prioritise immediate needs such as food and energy, we believe that long-term drivers will reassert as supply-constrained assets such as gold outpace inflation. Therefore, we are overweight gold relative to broad commodities.