Neuberger is cutting its exposure to European equities and upping its holdings in European bonds within its multi-asset strategies to reflect a more challenging growth outlook for the region.
The market sell-off on 10 October, which saw US equities fall 3% after President Trump’s threat of “massive increase” in tariffs on Chinese foods, in addition to falls in credit markets last week, has been a reminder of how vulnerable markets are to bouts of volatility, said Erik Knutzen, co-CIO of multi-asset strategies at Neuberger.
“Volatility is only a headline away, and multiple macro risks still have the power to trigger sharp risk-off moves,” he said.
In these periods, Knutzen said the question becomes not where to look and when, but how to position across markets to mitigate the impact and capture any related opportunity.
“Single-day shocks like 10 October and last week’s credit wobble do not alter our constructive thesis, but they do create opportunities to observe potential stresses or unintended exposures in portfolios, with the ability to rebalance and reposition as necessary,” he said.
One of the “notable recalibrations” from Neuberger’s outlook has been pairing back its exposure to European equities and the euro from overweight to neutral, while increasing its weighting to European fixed income.
“This was not just discipline, but a way to capture a dislocation between European equities and bonds, largely reflective of a more challenging growth outlook for Europe, potentially provoking the European Central Bank to make additional rate cuts,” said Knutzen.
“In such a growth-constrained setup, bonds can be additive to returns and strengthen portfolio diversification,” he added. “This aligns with our view that duration – expressed primarily in European rates and in US rates more selectively – looks attractive as long-term yield concerns fade, and as yield curves are expected to remain more stable (if not flatten) after 2025 has seen substantial steepening.”
As markets recover from the recent bouts of volatility, Knutzen said attention will turn to where and when the next flare may come.
“As the US government shutdown extends into its third week, this could be one area markets choose to focus on,” he said.
“It is therefore key that investors stay alert to the continued macro risks that may stalk global markets but use future bouts of volatility to play offense. This is an environment to compound returns through discipline – rebalance on strength, add on dislocation, and let diversification and active levers turn inevitable flare-ups into opportunity.”
