Quarterly Outlook
Equity outlook: The high cost of global fragmentation for US portfolios
Charu Chanana
Chief Investment Strategist
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US bonds are flashing a warning
Charu Chanana
Chief Investment Strategist
Key points:
- Rising yields send warnings with the dollar falling: Investors are demanding a fiscal risk premium, not pricing in growth.
- Global markets are outperforming: Europe and China are seeing inflows as confidence in U.S. assets wanes.
- Diversification is critical: Both across geographies and asset classes, especially with policy uncertainty, structural deficits, and the potential political volatility ahead.
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The bond market is sending out distress flares. Yields are climbing—but instead of strengthening the U.S. dollar, they are coinciding with a weaker USD. For investors, this isn’t a vote of confidence in U.S. growth. It’s a sign that something may be breaking beneath the surface.
The scoreboard tells the story
While the S&P 500 is down slightly this year, other global markets have surged:
- S&P 500: -0.6% YTD
- Germany’s DAX: +21% YTD
- Hong Kong’s Hang Seng Index: +18% YTD
Capital is moving—quietly but clearly—toward markets with attractive valuations and supportive policy backdrops.
What’s driving the disconnect?
- Fiscal risk premium: Investors are starting to demand more compensation for holding U.S. Treasuries. With deficits ballooning and political uncertainty rising, higher yields may not reflect optimism—but concern.
- Diminished confidence in U.S. assets: In a typical cycle, higher yields draw in foreign buyers. But if the USD is falling despite those yields, it could signal that investors are starting to look elsewhere—questioning U.S. exceptionalism.
- Repricing of Fed expectations: Markets may be anticipating rate cuts as economic momentum fades, but long-end yields are rising due to sticky inflation or supply concerns. That’s a bearish steepening—not the kind that fuels rallies.
What it means for investors?
This combination suggests a fragile market regime—where nominal returns may look attractive, but real risks are rising. This is a time to be selective and strategic:
- In the U.S., focus on quality—names with pricing power, healthy balance sheets, and global exposure.
- Rebalance towards global equities and emerging markets where the policy cycle is more supportive.
- Consider exposure to sectors benefiting from stimulus tailwinds in Europe and China
- Consider currency diversification as the USD weakens and FX volatility rises
- Gold deserves a second look—while higher yields often weigh on gold, this time it’s being supported by central bank buying, fiscal risks and a desire for stability.
Markets are shifting. It’s not just about chasing yield—but understanding what that yield is really telling us.
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