Summary of Views
Given that the market has already anticipated the actions of the Federal Reserve and considering the slowdown in growth as well as potential geopolitical risks, we maintain a moderately rather than fully overweight stance on global equities. We continue to expect that the stock market rally will not be limited to mega-cap technology stocks, supported by the Fed's "commitment" to keep economic growth on track.
As the peak of bond defaults appears to have passed, and with the market's demand for yield remaining strong and net supply being minimal, we continue to favor high-yield credit.
We believe the surge in gold prices is likely to persist; we remain bullish on oil.
In our view, downside risks include wider unrest in the Middle East and a surge in inflation. Upside opportunities include a strong upward shift in the global economic cycle and a weakening US dollar. Robust fiscal stimulus in China could also present upside opportunities for emerging markets.
Equities: Fundamentals Remain Favorable, Looking for Entry Points
We maintain a moderately overweight stance on global equities. Despite increased market volatility last quarter, we remain confident in the resilience of corporate and global economic fundamentals. With the risk of a hard economic landing being low and inflation largely under control, companies in developed markets are poised for strong earnings growth. Following recent rate cuts by the Federal Reserve and the People's Bank of China, we anticipate that most central banks will ease monetary policy over the next 12 months.
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After the Fed's September rate cut, the market reached new highs, and US equities appear overvalued based on traditional valuation metrics. Therefore, we maintain a neutral view out of caution. However, considering the downward trajectory of interest rates and the potential for long-term earnings growth, US indices seem closer to fair value. Productivity growth has far outpaced the rise in unit labor costs, enhancing corporate competitiveness. Corporate profit margins have expanded, providing support for the strengthening of their profitability.
Following the volatility in August, Japanese equities appear more attractively valued, and after pausing investment in the market earlier this year, we are now re-engaging with Japanese equities. We believe this volatility was primarily driven by dynamic changes related to investment strategies and technical analysis associated with arbitrage trades, rather than fundamental weakness. Additionally, we believe that the structural foundation of Japanese equities— including improvements in the macroeconomic backdrop, corporate reforms, and increased cash returns through share buybacks— remains largely intact, with room for further re-rating. Our expected returns stem from a balanced development of valuation expansion and earnings growth.
For the Chinese market, recent stimulus measures have positively impacted liquidity and market sentiment. However, we are still awaiting more policy details to determine if this marks a long-term inflection point for market sentiment and valuations. Compared to other markets, our view on European equities is more negative. With the exception of sectors more reliant on domestic demand, such as banking and utilities, the earnings outlook for European equities is bleak, and the region's stock market remains heavily dependent on an improvement in the global economic cycle.Industry-wise, we are more optimistic about the financial sector, followed by the non-essential consumer goods, utilities, and information technology (IT) sectors. We have an underweight view on materials, essential consumer goods, and communication services. These relative industry preferences form a more balanced cyclical perspective, and our bullish stance on IT and bearish stance on communication services neutralize direct bets on the "FAANG" stocks.
Credit: Still has conditions for moderate over-weighting
With central banks around the world cutting interest rates, inflation falling back, and a positive economic growth trend, the macro background continues to favor credit investments. Under the backdrop of a positive earnings season, corporate balance sheets have become stable and remain healthy. The peak of high-yield credit default rates has passed, and more relaxed capital markets make it easier for companies to refinance and repay debts, reducing the impact of the "maturity wall." Strong demand has fully absorbed supply as investors lock in attractive comprehensive yields.

We expect that under this environment, spreads will remain within a certain range. Therefore, income will be the main driver of returns next year, with limited opportunities for spread tightening. Compared to investment-grade credit, we prefer high-yield credit, which offers more attractive returns and has the potential to maintain a good momentum against a healthy macro and fundamental background.
However, we still believe there are some risks in the credit sector, so our view is to moderately over-weight it. We do not have a particular regional preference; previously, we were more optimistic about European high-yield credit than emerging market credit. We believe the return differences between markets have narrowed, and the high risks of French fiscal policy and more rate cuts from the Federal Reserve provide potential investment opportunities for emerging market assets.
Commodities: Amid chaos, focus on gold and oil
We maintain a moderate over-weight view on commodities, mainly bullish on gold and oil—both of which could effectively diversify investments amid heightened geopolitical risks.
We believe that gold prices will continue to be supported by policy rate cuts in 2025, which usually leads to increased demand for gold. Central bank purchases of gold remain strong, and retail gold demand in China and India have increased under the stimulus of tax incentives.
We believe the recent decline in oil prices and positive roll yields (reflecting lower long-term futures costs) support our positive view on oil. However, our optimism about oil prices is somewhat limited by the possibility of additional supply entering the market and depressing prices.
Risks and OpportunitiesOn the downside risks, the main factors include a re-acceleration of core inflation, leading to central banks revising their current expected interest rate paths, as well as unexpected downward earnings for mega-cap stocks. We are also closely monitoring geopolitical conflicts in the Middle East; if these conflicts continue to escalate, they could push up oil prices, causing friction in supply chains and thereby increasing macroeconomic uncertainty.
On the upside risks (opportunities), the main factors include an upward inflection point in the global growth cycle and a weakening US dollar. In this scenario, lagging players globally would catch up, and risk assets would reap greater gains. Another upside risk (opportunity) is that if inflation declines more than expected, central banks would cut interest rates faster than currently priced in. Lastly, an upside risk (opportunity) worth mentioning is that third-quarter earnings season outperforms expectations, with expanding profit margins indicating increased productivity.
Impact on investments
Consider continuing to invest in global equities: We believe that, despite expensive valuations and "political noise," investors should consider increasing their risk appetite, as we expect positive fundamentals and monetary policy to support earnings.
The equity rally is expected to broaden further: We believe the Japanese stock market has upside potential. In the US stock market, earnings prospects should improve in areas other than large-cap US technology stocks, which would favor value stocks, small caps, and some cyclical stocks. Among various sectors, we favor financials, IT, utilities, and consumer stocks over materials, consumer staples, and telecommunications.
In fixed income, prefer credit over duration: Despite narrowing spreads, we remain bullish on credit, considering yields, strong supply and demand technical analysis, and declining default rates. We prefer to overweight high-yield credit.
Consider a modest allocation to commodities: We believe that gold and oil prices will have room to rise in the coming year.