Schroder Investment 

Investing beyond US exceptionalism
Capturing opportunities in global equities and bonds

Part 1: Markets Review
Global shares advanced in May as concerns over tariffs eased. The US and China agreed a 90-day suspension of tariffs on most goods. Sovereign bond yields rose (meaning prices fell) amid rising worries over debt sustainability.

Overview Total returns (net) % 

_{Source: LSEG DataStream. Local currency returns in May 2025: *5.1%, **-1.3%.}

Part 2: Global Economic Outlook 
The 90-day pause in reciprocal tariffs between the US and China reduces the risk of a sudden halt in trade and a sharp increase in unemployment. As a result, we believe the risk of recession has diminished. We have therefore upgraded equities to a positive stance, with a focus on financials in the US and Europe. This sector continues to benefit from steeper yield curves and is relatively less exposed to trade-related risks.
Beyond the short-term trade developments, our broader investment stance continues to reflect heightened geopolitical uncertainty. We believe the disruption caused by the Trump administration still casts a shadow over the narrative of US exceptionalism. One of the key themes we outlined in our December notes – dispersion - has so far proven to be the defining trend of 2025. In this environment, we have moved away from a concentrated US equity focus, as held last year, toward a more geographically diversified exposure. This year we have favoured Europe but also include Japan and emerging markets. Consistent with this broader theme, we remain positioned for US dollar weakness.
We maintain a neutral view on government bonds. While yields have risen and valuations have improved, medium-term concerns remain due to increasing debt levels and lingering inflation risks in the US. Although market expectations have moved closer to our outlook, we still anticipate less policy easing from the Federal Reserve (Fed) than is currently priced in. Outside the US, inflation concerns are more muted, and we have gone long on Bunds versus US Treasuries. We continue to favour gold as a portfolio diversifier and remain negative on energy due to strong supply growth. We are also cautious on US credit - particularly high-yield debt - as technical indicators are weakening, removing a key support for spreads.

Part 3: Multi-Asset View

_{*Global Emerging Markets includes Central and Eastern Europe, Latin America, and Asia.}

4. Conclusion: Investing beyond US exceptionalism
a. As the S&P 500 appears increasingly expensive, the landscape is shifting: There is potential for more efficient models emerging from various innovators, including those like DeepSeek, which raises intriguing questions about the US' enduring supremacy in sectors like artificial intelligence (AI). This signals that it may be time to broaden our focus and exposure beyond just US mega-caps from a global thematic approach to better capture growth.

b. Looking towards Europe: Europe, often overlooked, presents an attractive investment opportunity due to its appealing valuations. Current sentiment is largely negative, but that pessimism could pave the way for surprising outperformance. Ultimately, whether European markets exceed expectations or move in sync with US trends, the risk-reward profiles look compelling. By embracing these new horizons, we are better equipped to navigate whatever the market may throw our way.

c. Maximising diversification with alternative sources of income: To further enhance diversification with an investment portfolio, consider allocating to alternative sources of income besides traditional credit and equities. Two noteworthy options are:
Securitised credit: This sector has historically consistently outperformed other fixed-income assets in rising rate environments. It taps into various economic drivers, such as consumer behaviour and housing markets, and typically shows low correlation with traditional corporate credit, making it a powerful tool for diversification.
Insurance-linked securities (ILS): ILS offer attractive risk-adjusted returns and low correlation to conventional asset classes like equities and bonds. These securities are designed to transfer insurance risk associated with large natural disasters, opening up unique investment opportunities.
In summary, while US equities have performed admirably for valid reasons, it is essential for investors to adopt a more balanced and diversified approach to navigate uncertainty in a dynamic manner. Integrating European equities, exploring opportunities in non-mega-cap US sectors, and incorporating diverse, alternative income sources are all crucial steps toward building a diversified, resilient portfolio. By broadening the investment landscape, investors can better position themselves for potential outperformance and a resilient income stream in a dynamic market environment.