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Chair of The Investment Institute by UniCredit
Manuela D’Onofrio
Dear Clients, We are pleased to present The Compass 2026, our flagship annual publication offering a distinctive European perspective on the global economy and financial markets. Trump 2.0 has proven more tumultuous and disruptive than many imagined just a year ago. The old global order is unravelling but the new one remains undefined. We can glimpse some emerging contours: a more interventionist state, national interests prevailing over global rules and a more inward-looking US. Despite resilient global growth in 2025 and strong equity-market performance fuelled by the AI boom, uncertainty persists. The enthusiasm about the transformative potential of AI has been tempered by concerns over a fading Pax Americana. The US dollar has weakened by roughly 10% across major currencies, while gold has surged to record highs. Looking ahead, 2026 is likely to bring more of the same. AI will remain the dominant market narrative, while President Donald Trump’s unpredictable policies will continue to inject volatility across trade, fiscal policy, security and immigration. The potential politicisation of the Fed is among our key concerns. In this environment, agility and diversification are essential for investors. Valuations remain elevated, leaving little room for disappointment and reinforcing the importance of selective positioning and risk management. We invite you to explore our second edition of The Compass, in which we examine these themes in depth and outline their implications for investors. Best wishes for next year! Manuela and Fabio
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Co-Chair of The Investment Institute by UniCredit
Fabio Petti
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2024 has been a historic election year, with over two billion people casting votes globally. The results have often been surprising, yet democracy has shown remarkable resilience. As we look to 2025, the full impact of electoral shifts will become clearer. Among the most significant developments will be the return of Donald Trump to the White House – a pivotal moment that will undoubtedly shape the global economy. The Compass 2025, prepared by the newly formed Group Investment Strategy team, offers a comprehensive view of our economic forecasts and their main financial implications. Next year geopolitical tensions are expected to intensify, protectionism to rise and industrial policies to become more intrusive. However, this environment will also present significant opportunities for positive changes: Europe, for example, may finally address existential challenges, as it always shifted gears when strictly necessary. In the coming months, major central banks are likely to continue easing rates, albeit at a different pace. In 2025, we may see divergence in monetary policy on the two sides of the Atlantic, on the back of heterogeneous patterns in domestic growth and inflation. Our outlook for 2025 is then marked by cautious optimism: a macro environment characterized by easing monetary policy and positive economic growth will support risk appetite in 2025, as the tightening cycle has replenished central banks’ toolboxes, creating room for bold action in case of need. This is good news for equity and bond returns in 2025, but it will not necessarily translate into an all-clear for global markets. US equities probably show the highest potential for the coming quarters, despite concentration and lifted valuations, but opportunities will also arise in other regions. Bonds will be in demand given their still-attractive carry, with rate cuts being well priced into government and corporate bonds. We hope you find our insights valuable, and we wish you a successful 2025. Manuela and Fabio
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The Trump aftershock In seismology, a major earthquake is usually followed by aftershocks – smaller tremors that can occur for some time while the earth’s crust adjusts. If 2025 experienced Trump’s second-term earthquake, 2026 will see the aftershock. The global economy is likely to shake again next year, although the magnitude of the shock will be far more contained than what we have experienced this year. US President Donald Trump still has plenty of ways to jolt markets – and he will not hesitate to act if he sees a political payoff, no matter how shortsighted it may be. However, since returning to the White House, he has opened so many fronts in such radical fashion that any future move is likely to be incremental rather than sweeping. Political constraints With the midterm elections looming, Trump is likely to act cautiously to avoid destabilising the economy through shock-and-awe moves. With his approval rating falling, Trump is trying to address the affordability crisis by reconsidering tariffs on food products and by redistributing part of the tariff revenues to all Americans except top earners. Likewise, many policy decisions taken in 2025 will tie his hands next year. With the federal budget deficit above 6% of GDP, there is no room for another One Big Beautiful Bill. Next year will bring the full impact of the fiscal measures approved before the summer. Meanwhile, layoffs and hiring freezes have left federal agencies short-staffed, limiting the scope for further cuts. Another “Liberation Day” of global tariff hikes is off the table. The US is still grappling with the first round of reciprocal tariffs. What is more likely is that Trump revisits specific trade agreements signed recently and threatens new protectionist measures to gain leverage with certain countries if tensions were to escalate. The main uncertainty lies with the Fed. Political interference will likely rise but checks and balances – including the Supreme Court – make a full takeover improbable. We see only two more rate cuts through 2027, as the natural rate drifts higher amid the AI boom, low household savings and a high fiscal deficit. The Trump aftershock will be felt globally China has been preparing for a fracturing global order for almost a decade. Its strategy of self-reliance is paying off, even in semiconductors – an area where China has been traditionally reliant on the US. While the fruits of this farsighted policy approach are visible on the supply front, with Chinese manufacturing having clearly moved up global value chains, domestic demand remains too weak. Thus, reliance on exports remains strong and is a source of vulnerability. The trade truce with Washington is likely to last until next fall, but Beijing will not shy away from weaponizing the export of critical materials if needed. At the same time, the tech race with the US will likely intensify, with China focusing more on AI application and the US on foundational AI models. Europe is trying to adjust to Trump’s ruleless order, which is driven solely by national interests. After bold announcements in 2025 – Germany’s fiscal bazooka and major defence initiatives – 2026 needs to be a year of implementation and delivery on the ground. The aftershock, which will be less intense than the original quake, may weaken Europe’s resolve to confront new challenges head-on. Realistically, a piecemeal approach seems more likely therefore. However, next year we might also see the emergence of coalitions of the willing in some areas, which could turn Europe into a proper geopolitical actor in the future. Market consequences For markets, the aftershock will certainly be less destabilising than the original shock. For this reason, pressure on the US dollar may ease somewhat, even though its future as a safe haven remains uncertain. Similarly, government bond yields on both sides of the Atlantic are likely to edge slightly higher throughout our forecast horizon. Gold might still benefit from the uncertainty generated by the shift from one global order to another. Global equity markets are set to climb further next year. Overall, the AI story remains intact. In our view, there is no AI bubble, but this does not mean that there are no risks. But we need to look at them through the right lens. Comparisons with the dotcom bubble are misleading. The Mag 7 are not start-ups with exciting business ideas but no products to sell. They are mature, cash-rich and earnings-generating companies. A better comparison is the railway mania of the mid-nineteenth century in Britain. Back then, excessive leverage and overcapacity caused the bubble to burst. The main area of vulnerability for the AI boom is indeed the buildup of the AI infrastructure, where the risk of overinvestment is high. The first year of Trump 2.0 front-loaded disruption; what follows in 2026 is likely to be a phase of adjustment rather than another tectonic shift.
What world?
Chief Editor of The Compass 2026
Edoardo Campanella
Every four years, immediately after the US presidential election, the National Intelligence Council (NIC) publishes its Global Trends report – a bold foresight effort to help the incoming administration envision what the world could look like two decades out. The report’s aim is not to make crystal-ball predictions but rather to identify the key structural forces shaping the future. President-elect Donald Trump will receive the new issue of the report before Inauguration Day on 20 January. The report will look at the world in 2045. In 2008, when Barack Obama became president, the NIC released Global Trends 2025: A Transformed World. As 2024 draws to a close, we think it is worthwhile to reflect on what the NIC predicted two decades ago to gain some insight into what 2025 might hold in store. The key prediction was that “The international system – as constructed following WWII – will be almost unrecognizable by 2025”. The US-led unipolar order was expected to be replaced by a multipolar world – chaotic, unstable and ripe for conflict. The NIC was right in many respects. The Pax Americana is crumbling. New power centers are emerging, military conflicts are on the rise and the world is being divided along geopolitical lines. A second cold war appears to be looming. Mr. Trump’s first term catalysed some of the structural trends the NIC identified almost a decade earlier. He turned his back on the global liberal order, embracing isolationism and protectionism. Ultimately, Trump 1.0 was a presidency of disruption and discontinuity. Trump 2.0 will undoubtedly shape 2025, but this time, Mr. Trump is expected to be a president of continuity. Like it or not, we already live in a Trumpian world, one characterized by rampant protectionism, wide-ranging industrial policies and rising geopolitical tensions. During his second term, Mr. Trump will likely accelerate some of these dynamics through outright transnationalism and unilateralism. However, compared to his first term, he could also be a president of restraint – this is our hope, at least. Today’s world is far more dangerous than in 2016. With two major conflicts underway, in Ukraine and the Middle East, and increasingly strained relations with China, there is less room for miscalculation. Trump 2.0 will probably be a less-inflationary presidency than many fear. Mr. Trump has his sights set on 2026 (midterm elections) rather than on 2028 (presidential elections). If he adopts policies that are too inflationary, he will likely pay the price in 2026 by losing Congress. After making some symbolic decisions related to targeted tariffs, immigration and taxes in the first months of his presidency, to follow through on campaign promises, he is likely to try and shift attention away from economic promises and towards identity issues. Given the uncertainty and risk associated with Mr. Trump’s economic agenda, the Fed will likely be more cautious than it would have been if Kamala Harris had won. It will likely use the first half of next year to cut rates towards 4%, when there will not yet be any visible impact from Mr. Trump's policies. Although the ECB and the BoE will likely continue towards neutral territory, a less-dovish Fed might make them more hesitant. Like central banks, the rest of the world will have to adapt to the shifts and shocks triggered by Mr. Trump’s return to the White House. The EU will face a critical choice in 2025: whether to step up and become a true geopolitical superpower, with a cohesive industrial and defense strategy, or to continue drifting in a world of rival blocs and a less-engaged US. In 2008, the NIC regarded the latter scenario as more likely. The other big challenge for Europe will be to stick to its climate change commitments despite a probable setback on this front by the incoming Trump administration. Similarly, China will have to decide whether to upgrade its growth model away from exports and investment and towards private consumption. With Mr. Trump in the White House, the world will be even less willing to absorb China’s overcapacity, particularly regarding electric vehicles, solar panels and batteries, and this could lead to an intensification of current trade tensions. The 2008 NIC report barely mentioned artificial intelligence (AI). Back then, AI was still a nascent technology. In 2025, AI will continue to shape the direction of stock markets, possibly leading to market stress due to the high concentration of tech stocks. Given the centrality of chips to the development of AI, Mr. Trump’s ambiguous attitude towards defending Taiwan’s status could be another source of volatility for tech stocks. In its 2008 report, the NIC missed the shale-oil revolution in the US, which was to reshape the oil market around five years later. The report claimed that, by 2025, the world would enter a post-oil economy – as supply was not expected to keep up with demand. In reality, and despite rising demand, the oil market is dealing with oversupply, which could be exacerbated by Mr. Trump’s support for the US oil industry. However, a global shift towards electrification is making the global economy less-oil-intensive and relatively more metal-intensive. If trade tensions escalate between the US and China (which controls a large supply of key metals), we might see a new type of energy shock in 2025 – one centered around metals rather than oil. What the NIC did not predict in 2008 was the erosion of American democracy. This is a trend that will likely last beyond 2025.
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Global economy to show adaptive resilience in 2026 We expect global GDP to rise 3.1% yoy in 2026 and 3.2% in 2027 after 3.2% in 2025. While more protectionism will trigger some negative demand effects, the private sector continues to show a remarkable capacity to adapt. For instance, European companies front-loaded exports early in 2025, while their US peers reorganised supply chains to blunt the impact of higher tariffs. Furthermore, companies may get used to heightened policy uncertainty, which would reduce the negative impact on the global economy. Although the trend in annual global goods trade growth might decline to 2-3%, from 4%, accelerating trade in services is likely to compensate for this. Further digitisation and AI could accelerate the shifting composition of global trade towards services. Meanwhile, governments have been subsidising the manufacture of strategic goods such as chips and batteries to reduce dependence on China. These efforts will dampen the negative demand effects but will also raise public debt levels. If investors demand higher yields to hold this debt, central banks could come under pressure to suppress borrowing costs.
US economy: solid but K-shaped We expect the US economy to post solid growth next year (2.1%) and in 2027 (2.0%) thanks to fiscal support, AI investment, some easing of policy uncertainty and favourable financial conditions. The government shutdown will weigh on 4Q25 GDP growth, but this loss is likely to be almost fully recouped in 1Q26. The main question for the outlook is whether the bigger risk is the recent weakness of employment growth or too-high inflation. We fall in the latter camp. US economic activity has been remarkably resilient in 2025, despite much higher tariffs and policy uncertainty, and in large part due to strong AI investment and spending by higher-income households. Lower-income households are under some stress (the lower leg of the so-called K-shaped economy), but we don’t expect this to spread. Hiring has slowed notably, although this is mainly due to lower immigration, and partly due to the impact of heightened economic uncertainty and AI investment on labour demand. To the extent lower hiring is due to lower immigration, it does not signal slack. We expect heightened economic uncertainty to ease somewhat, or at least firms to become used to uncertainty. Hiring should pick up, but with a lower elasticity to employment than its historical relationship. The unemployment rate may rise, but likely not by much. Measures of underlying inflation are currently around 3%, and we expect core inflation to peak at 3.5% over the next six months. Pass-through of tariffs likely has further to run, as stockpiles from frontloading of imports are run down, and tariff-related uncertainty (which had led some firms to wait before passing on tariffs) eases. Indicators of non-housing services inflation have picked up recently, and measures of short-term inflation expectations remain elevated. The tariff impact should fade from the second half of next year, although we expect inflation to remain above target through 2027.
China: no rebalancing We are maintaining a cautious growth outlook for China, projecting growth of 4.1% in 2026 and 3.8% in 2027 (2025: 5.0%). The deceleration reflects a confluence of domestic and external headwinds that are unlikely to abate quickly. The real-estate correction continues to erode household wealth and confidence, with high developer debt suppressing housing starts. Consumers remain cautious, prioritising precautionary savings amid job insecurity and demographic pressure. Fiscal-policy stimulus is likely to remain targeted and too modest to trigger a meaningful rebalancing towards household consumption. Instead, China is likely to keep leaning on its established growth model: heavily subsidised investment in strategic sectors and exports to absorb industrial capacity. Furthermore, “tech nationalism” will probably feature prominently in the next Five-Year Plan that will be formalised next spring, i.e. a further upgrading of manufacturing and working towards breakthroughs in semiconductors and other foundational technologies. Since sticky US tariffs will keep pressure on exports, Chinese companies will probably divert exports from the US to Europe. With weak price dynamics, we expect the PBoC to ease further through measured rate cuts, liquidity operations and directed credit.
Eurozone shows resilience, fiscal policy to provide support The eurozone economy has weathered the tariff storm better than expected. Business confidence is holding up reasonably well amid continued high volatility in exports to the US. Domestic demand remains on a trajectory of slow but positive growth and the risk of a downturn in the labour market is still contained. However, the current economic resilience should not be taken for granted. A low business investment rate indicates that eurozone firms are reluctant to embark on new projects, while households continue to increase their precautionary savings from already high levels. In this environment, fiscal policy will have to play a decisive role. Our working assumption is that Next Generation EU (NGEU) investments will fire on all cylinders ahead of the expiry of the program at the end of 2026, while the boost from Germany’s infrastructure and defence programs will kick in only gradually due to implementation challenges and bottlenecks. The growth impulse from the pan- European rearmament plan will probably be small and backloaded. Households are likely to remain cautious and the growth rate of private consumption lacklustre. Following a continuation of slow growth at the turn of the year, we project a gradual reacceleration of economic activity over the course of 2026, supported by fiscal policy, a reduction of tariff-related uncertainty and the lagged effect of ECB rate cuts. In yearly average terms, GDP will probably rise by 1.0% in 2026 and by 1.4% in 2027. At a country level, we expect growth of 0.9% in Germany (1.2% in non-working-day adjusted terms) next year, followed by a robust 1.8% in 2027 (non-adjusted: 1.9%). In France, we forecast growth of 0.9% for 2026 and 1.1% for 2027, while for Italy we have pencilled in 0.6% and 0.8%, respectively. The price outlook is benign. Headline inflation will likely settle slightly below 2% in 2026-27, while core inflation resumes a downward trajectory and dips below 2% as wage growth continues to ease. Underlying price pressure might bottom out toward the end of 2026 or in early 2027.
CEE: growth may pick up amid still-lingering fiscal risks Economic growth in CEE is set to pick up in most countries in 2026, driven by recovering external demand and stronger investment, supported by increased absorption of EU funds. Consumption remains the key growth engine, backed by tight labour markets and positive, though moderating real wage growth (apart from Romania). GDP growth may range between 2.0% and 3.3%, with Romania and Slovakia trailing due to fiscal consolidation. Fiscal risks related to political developments will be in focus in Hungary, Poland, Romania and potentially Czechia (see box). Inflation should stay within target ranges, except in Hungary and Romania, although fiscal and regulatory steps pose upside risks. Central banks are thus likely to remain cautious, with room for further rate cuts next year mainly in Poland, Romania and Serbia. In 2027, the expiry of the Recovery and Resilience Facility (RRF) will reduce EU fund inflows, but stronger external demand, boosted by German fiscal stimulus, should contribute to keeping GDP growth between 2.0% and 3.0%. Slovakia will likely lag again due to fiscal consolidation. Inflation may stay within target, and we expect most central banks to keep interest rates stable, except in Hungary and Romania, where we see room for reduction. Politically, the focus will shift to elections in Bulgaria, Slovakia and Poland.
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2026: a year of geoeconomic adjustment, not upheaval
ECB on hold We expect the ECB to keep the deposit rate at 2% for a prolonged period. In 1H26, the risks remain tilted towards a final cut amid still-weak growth and below-target inflation. A progressive strengthening of economic activity will then lead to a shift in the balance of risks around the medium-term inflation outlook. We have pencilled in a 25bp rate hike towards the end of 2027, with the view that rates could move from the mid-point of the ECB’s neutral range (2% currently) to the upper end of this range (2.5%) by 2028. In terms of balance-sheet policies, we see quantitative tightening (QT) continuing at the current pace throughout 2026, after which liquidity conditions might lead to increased volatility in money-market rates.
Fed cuts limited by the macro-outlook We expect the Fed to hold rates steady for six months, then cut by 25bp in June 2026 and 4Q26 to 3.25-3.50%, followed by steady rates in 2027. High core inflation and solid growth mean there is no macro reason for rate cuts. We have assumed a modest impact from political interference on Fed policy. Powell’s term as chair expires in May 2026 and the chair has an outsized role in influencing deliberations. We have not assumed Trump gets de-facto control of the Fed as this would require a sequence of ifs; for example, if in January 2026 the Supreme Court were to rule Governor Cook can be fired, and if in February a majority on the Fed Board refuses to appoint regional Fed presidents not aligned to Trump. The situation remains very fluid and a full politicisation of the Fed cannot be ruled out. As we discussed in our Short View – The economic and market impact of a political Fed, this would lead to an aggressive monetary easing, a weaker USD, lower short-dated yields and a significantly higher term premium due to a spike in inflation expectations. We now think the longer-run equilibrium interest rate is around 3.5% as the economy has proved remarkably resilient despite higher real interest rates.
BOJ: tightening to resume, but still gradually Japanese long-term yields have risen, and the JPY has fallen amid fears of a financial crisis in Japan after the new fiscal plan was announced. We think these worries are probably overstated. Japanese debt is almost fully held domestically reflecting one of the highest private saving rates in the world. Yet, the BoJ is facing two opposing pressures, one from the real economy and another from the moral suasion employed by the new government to delay or slow the pace of new rate hikes. Japanese inflation is close to 3%, compared to the BoJ’s 2.0% target. This, together with wage pressure, is making Japanese real rates too low and calls for tighter monetary policy. Until now, however, BoJ Governor Kazuo Ueda has been vague about the timing of further moves, probably in anticipation of political decisions by new Prime Minister Sane Takaichi, who is in favour of very expansive fiscal policy and against a rapid increase in interest rates. We expect the BoJ to raise the target rate from the current 0.50% to 1.00% in 2026 (this level is considered the floor of the “natural rate” for Japan) and probably up to 1.25% by early / mid-2027.
BoE to cut by more than markets expect We expect the Bank of England to cut the bank rate by 25bp in December to 3.75%, followed by one 25bp cut per quarter through 2026 to 2.75%. Fiscal tightening, a deteriorating labour market, and negative base effects for inflation should see inflation moving down to around 2% next year, allowing the BoE to keep cutting the bank rate. We see rates steady in 2027 at 2.75%, a level we judge to be broadly neutral given the UK’s low productivity growth and signs of structurally higher precautionary saving from households.
ECB
FED
BOJ
BoE
Source: US Bureau of Economic Analysis (BEA), The Investment Institute by UniCredit
US AI INVESTMENT BOOM US REAL BUSINESS INVESTMENT (% YOY)
Source: Federal finance ministry, The Investment Institute by UniCredit Note: 2025 defence figure excludes EUR 26bn from 2022 shadow budget.
PUBLIC SPENDING TO RISE STRONGLY SPENDING OF FEDERAL GOVERNMENT (EUR BN)
Source: China Bureau of National Statistics, The Investment Institute by UniCredit
STRUCTURAL GROWTH SLOWDOWN IN CHINA REAL GDP, IN % YOY
The Trump afterschock
10Y UST and EGB yields are likely to trade sideways, since rate cuts are already priced in and due to heavy bond supply expected next year. Government bonds are expected to deliver a positive performance, mostly in light of carry. Across eurozone govies, we prefer BTPs to OATs, which remain sensitive to political developments in France.
Government Bonds
Global markets will enter 2026 with moderate growth but a fragmented inflation backdrop, leaving policymakers with little room for error. Structural shifts, in particular tariffs that have become entrenched, fractured geopolitics and the slow rewiring of supply chains, are now permanent features of the global economy that markets must contend with – rather than passing irritants.
equities
Against this background, equities retain their upside potential. The US is set to lead the way, powered by AI-driven productivity gains and fiscal investment that should sustain corporate earnings. Europe’s outlook is anchored by defence and infrastructure spending, yet soft demand and slower tech uptake are restraining momentum. Emerging markets appear resilient, supported by demographics and near-shoring, even as commodity volatility and refinancing risks linger.
fixed income
Fixed income faces a more challenging environment. Sovereign issuance is heavy, while central banks are easing only gradually, keeping yields elevated. Carry strategies are set to dominate, but duration risk has returned. European corporate credit markets should remain resilient, but the recovery phase of the credit cycle – marked by rising leverage and increased supply – suggests returns will hinge on carry rather than further spread compression.
Currency markets are pointing to a gentler decline in the USD, with de-dollarisation evolving incrementally rather than abruptly. We do not expect selling pressure on the USD to disappear in 2026. Uncertainty about Trump’s policies remains, and he may favour a competitive currency ahead of the US mid-term elections next November.
global markets
Market Convictions
CURRENCY MARKETS
Cautious optimism: risk-on meets geopolitical realities
Source: Bloomberg, The Investment Institute by UniCredit
UST AND BUND CURVES TO BEAR-STEEPEN MODERATELY CENTRAL BANK RATES, GOVERNMENT BOND YIELDS AND OUR FORECASTS (%)
Source: LSEG Datastream, I/B/E/S, The Investment Institute by UniCredit
12M FWD. EPS ESTIMATES EXPECTED TO RISE BY DOUBLE DIGITS IN 2026 12M FORWARD EARNINGS ESTIMATES AND THEIR 2026 YEAR-END EPS PROJECTIONS
Source: People’s Bank of China, The Investment Institute by UniCredit
VOLUME OF DIGITAL-YUAN TRANSACTIONS CNY BN
The AI investment surge: are we ignoring the risks? AI has become the dominant driver of equity markets, with tech stocks tied to the theme now representing roughly a third of the S&P 500’s market capitalization. This surge reflects unprecedented infrastructure investment in chips, data centers and power systems, creating a backbone for future innovation even as returns remain largely untested and hardware cycles add pressure. Platforms face monetization challenges as adoption outpaces proven revenue models, while commoditization risks narrow differentiation. At the application layer, the race for breakthrough use cases is still in its early stages, but the potential for transformative productivity gains and new business models is significant. History suggests that even periods of overinvestment often accelerate cost declines and adoption, reinforcing our constructive view that AI will reshape industries and deliver durable growth, with near-term volatility likely giving way to broad-based innovation.
geoeconomics
AI
Driven by massive technological change, the global auto industry is currently undergoing its most profound transformation ever. Chinese car manufacturers have taken the lead, especially with electric vehicles, while legacy automakers in Europe have been losing ground. We expect the European car industry to sputter on in 2025-26, given that it faces substantial structural challenges, such as the need to reduce production costs and having to catch up with regard to software and connectivity. However, there will also be glimmers of hope, as the negative impact of possibly higher US tariffs will be dampened by the fact that many German auto manufacturers are located in the US and can produce and sell their products directly there. Beyond 2025-26, our long-term outlook for European car manufacturers is constructive, as the technological race in the global auto market is not over but has just started. New massive technological change, such as the rapid evolution of battery technology and the rise of autonomous vehicles, is still to come, which will decide the winners and losers.
Europe’s critical raw materials dilemma Europe faces a strategic dilemma as its high demand for critical raw materials collides with limited domestic resources and processing capacity, creating vulnerabilities in its green transition and industrial resilience. BRICS+ nations, led by China, dominate global mining and refining of these minerals, leveraging decades of investment and supply-chain control. The EU’s Critical Raw Materials Act and related initiatives aim to reduce dependency, backed by significant investment and trade agreements. However, structural constraints and long lead times mean Europe will remain exposed to supply shocks and geoeconomic tensions for years, with implications for competitiveness and security. For investors, monitoring EU trade diplomacy, strategic projects and supply chains is essential as these factors will shape risk and opportunity.
GEOECONOMICS
Source: EU, US Geological Survey, The Investment Institute by UniCredit
PRODUCTION OF KEY STRATEGIC MINERALS IS HIGHLY CONCENTRATED SHARE OF MINERAL MINING PRODUCTION CLASSIFIED AS SRM BY THE EU
TECHNOLOGY IS CAPITAL-INTENSVE AGAIN CAPEX RATIO: MICROSOFT, APPLE, GOOGLE, AMAZON, META AND ORACLE
With macro conditions signalling stabilisation, asset allocation should reflect both resilience and selectivity. We see room for adjustments where fundamentals and valuations align. The most notable change is in emerging market (EM) equities: we upgrade our stance from neutral to overweight, as we aim to increase diversification in the technology sector and add exposure to Asian currencies while maintaining a neutral view on global equities. Attractive valuations, relatively strong growth and earnings prospects as well as supportive liquidity trends could offer investors a favourable entry point. Structural tailwinds in Asia and selective EM regions reinforce this view. In fixed income, we maintain a neutral position on global bonds but keep our overweight recommendation for EM debt. Despite lingering volatility, EM bonds continue to offer appealing carry and diversification benefits, supported by relatively sound fundamentals and easing inflation in several economies. We confirm our cautious stance on USTs and EGBs, as developed fixed-income markets present an unfavourable risk-return balance at the long end of the curves due to fiscal expansion. Overall, we are not advocating wholesale portfolio shifts. Instead, we lean into areas that combine near-term recovery potential with long-term growth drivers – EM equities and EM debt – while preserving diversification discipline across other asset classes. Importantly, our positioning continues to reflect a quality bias: we favour companies and issuers with robust balance sheets, resilient cash flows and strong governance standards. This approach ensures prudent risk management at a time when policy surprises or geoeconomic tensions could still unsettle markets. On the back of the above, we retain our cautious stance on the USD vs. the EUR.
1 Developed Markets: Australia, Japan, Hong Kong, New Zealand, Singapore
asset allocation Our investment view on asset classes
Leaning into opportunity while preserving balance
