Scenarios and Asset Class Implications

Our base case: Mild US recession, tepid global growth

The central scenario anticipates a modest US recession, driven by continued war in the Middle East, tariffs and other policies as well as increased unemployment. The Gulf conflict is driving up prices for critical commodities, which is exerting downward pressure on the US economy, especially the consumer. The Eurozone and Japanese economies are also expected to weaken owing to higher commodity prices caused by the war in the Middle East, but will likely see some benefit from the countervailing force of increased fiscal stimulus. China will likely experience growth below the 5% level, as fiscal spending is offset by property-sector headwinds and tepid consumer spending. The UK is prone to experience flat or slightly dampened growth. Emerging-market economies, particularly in Asia, are positioned for a boost, benefiting from AI-related capex spending as well as a weaker US dollar and favorable regional dynamics. Oil-exporting emerging market countries will likely benefit from higher energy prices. We expect the Federal Reserve (Fed) and most other major developed central banks to remain on hold or even tighten in this environment given concerns about elevated inflation.

Investment opportunities:

• Equities:

  In this scenario, we favour developed markets ex-US, especially the Eurozone, Japan and select emerging markets. Fiscal stimulus will likely generate positive momentum for both European and Japanese equities. Artificial intelligence (AI) capital expenditure (capex) will likely boost Asian emerging-market stock returns, while higher commodity prices will likely boost Latin American equities. These markets are also likely to benefit from relatively attractive valuations. UK equities could also perform well, looking attractive in terms of low valuations, high dividend yields and elevated buyback yields. There may be an upside for Chinese technology (tech) stocks within this landscape, given their lower valuations relative to US tech stocks, as well as the Chinese government’s policy support for certain industries within the technology sector. In terms of style, Quality is likely to be rewarded, given growing pressure on the global economy and growing concerns about a rise in AI spending-related debt. Against this backdrop, we find stocks with strong balance sheets appealing

• Fixed income:

  We prefer European credit, both investment grade and high yield, as we anticipate a more positive growth backdrop in the Eurozone. We see potential for a gradual steepening of the yield curve, which causes us to prefer shorter dated paper

• Currencies:

  In this scenario, the Japanese yen and the euro are likely to strengthen versus the US dollar, given expectations that the Bank of Japan will tighten its accommodative monetary policy stance, and the European Central Bank will likely be more hawkish than the Federal Reserve

• Alternatives:

  We lean towards equity market neutral strategies, given the potential for both selloffs and rallies over the course of the year. We also like diversified multi-strategy portfolios given the uncertainty and potential for market rotations. We are positive on relative-value strategies because in a non-crisis market environment, there will likely continue to be a high level of dispersion, which creates opportunities to pick winners and losers in long-short strategies. We prefer precious metals, such as gold, silver, palladium and platinum, which can represent ‘safe haven’ assets during selloffs, but may also benefit from their pro-cyclical exposure during market rallies because of their industrial uses

Downside scenario: Stagflation

The Middle East conflict worsens, resulting in elevated inflation for a prolonged period. This, in addition to policy errors, and a drop in AI capex investment, could push the US into a relatively deep recession. The Fed is unable to cut interest rates because of persistent elevated inflation. The economic downturn is softened for economies undergoing substantial fiscal stimulus such as the Eurozone, Japan and China.

Investment opportunities:

• Equities:

  In this outcome, we prefer select large-cap equities in defensive sectors such as consumer staples and regulated utilities. It is important to try to be as well diversified as possible given that correlations will likely rise in this environment, while avoiding exposure to growth and momentum factor risk

• Fixed income:

  We incline towards inflation-protected securities, which are likely to perform relatively well in a higher inflation setting. We also like sovereign debt with high credit ratings, which seemingly offers resilient potential in the face of a major economic downturn in the US. We recommend caution with corporate bonds in this environment and favour shorter duration and, all else equal, prefer to move up in seniority in the capital structure

• Currencies:

  We expect ‘safe haven’ currencies to perform relatively well in this scenario. However, not all are certain to remain as such. We hold a preference for the Swiss franc, the Japanese yen and the euro, and are more cautious about the US dollar, given some erosion in confidence

• Alternatives:

  We view gold as a ‘safe haven’ asset that is likely to hold up well in a ‘risk off’ environment. We also believe silver and some rare earth elements could offer some downside protection in this environment. We believe trend-following strategies and volatility risk management strategies are attractive as they have historically offered downside protection against a tumultuous backdrop

Upside scenario: Détente

The Middle East conflict ends quickly with minimal energy infrastructure damage and AI capex continues to increase. Emerging-market economies, especially Asian emerging markets, see an acceleration in growth. The Eurozone and Japanese economies also see a lift in gross domestic product. The US experiences a modest pickup in growth as the Federal Reserve eases monetary policy. 2026 becomes a “risk on” environment.

Investment opportunities:

• Equities:

  In this outcome, emerging-market Asian stocks appear attractive; we expect Chinese technology and US technology stocks to perform well. European cyclicals are well positioned to benefit from the improving economic environment. In addition, we are positive on smaller capitalisation stocks around the globe. We think cyclical sectors, such as industrials, materials, energy services, semiconductors/semiconductor capital equipment, shipping/logistics and selected financials appear attractive in this circumstance, as they can benefit from cyclical expansion. From a factor perspective, we favour growth and momentum

• Fixed income:

  We believe global high-yield bonds, private credit and selected emerging-market bonds (preferably hard currency) are appealing. These assets have historically performed well in ‘risk on’ environments. We would see value in emerging-market local-currency debt if real interest rates rise and credible disinflation gets underway

• Currencies:

  We lean towards commodity-exposed currencies, such as the Canadian dollar and the Australian dollar, which are likely to outperform in a ‘risk-on’ environment, given increased demand for industrial commodities when economies are growing

• Alternatives:

  We favour trend, long dispersion and long-levered, beta-replication strategies in this environment, as they are likely to enable investors to robustly participate in the ‘risk on’ environment

Market scenario outlook

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Source: All data sourced from Bloomberg, as at 15 May 2026.