Multi-Asset Insights
Key Highlights:
- Diversification is back at the top of the investment agenda. Amid increased market volatility, and with geopolitical tensions expected to continue influencing the macroeconomic environment, vigilance is required in pursuing opportunities while protecting portfolios from unnecessary risks
- We explore the quality factor as an effective way of integrating defensive characteristics into equity allocations. This strategy reduces downside risk while allowing for participation in market upswings
- Against a backdrop of country rotations, European equities may offer selective opportunities, particularly in sectors where earnings growth is superior to US peers. Valuation discounts, alongside an improving macroeconomic backdrop and earnings trajectories, suggest further catch-up potential
European equities: the catch-up case
European equities have faced a prolonged period of underperformance compared to US counterparts due to a combination of factors. While there are significant challenges to overcome in Europe, recent economic surprises have been positive. We see selective opportunities for investors.
Valuation discounts remain significant, particularly in sectors such as financials and utilities, where earnings growth is outpacing US peers, presenting clear catch-up potential. An improving earnings outlook, coupled with supportive fiscal policies, could provide broader momentum. We analyse the structural factors that have hindered European equities and the changes underway that could unlock value.
The role of quality in defensive portfolio construction
In an increasingly volatile market, the quality factor emerges as a useful component of defensive portfolio strategies. Quality equities, known for their strong profitability, financial health and consistent earnings, can provide a buffer during economic downturns.
Research demonstrates that quality stocks tend to outperform during market contractions while also participating in recoveries. This makes them an appealing consideration for long-term, strategic portfolio allocations. However, a careful approach to portfolio construction is important, as sector and geographic biases can influence portfolio characteristics.