Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

Our top tactical picks for Q2 2025—and how to play them

1: European independence—capturing Europe's strategic autonomy

• Overweight: Europe is undergoing a major shift toward independence and self-reliance, driven by weakening US security commitments, deglobalization, and a push for economic resilience. This has triggered unprecedented investment in defence, infrastructure, technology, and renewable energy, supported by initiatives like Germany’s fiscal stimulus plan and the EU’s defence loan—specifically favouring European over US suppliers. For investors, this theme offers strong upside potential, backed by substantial government funding and policy momentum. Companies stand to benefit from reshoring efforts, local investment, and changing consumer preferences. Read more here. 
• Risk to watch: The success of this theme depends on Europe’s ability to execute its fiscal expansion effectively. Rising bond yields or political fragmentation within the EU could slow progress and dampen investor sentiment.
• How to play it: Invest in our targeted basket of European equities benefiting directly from Europe's push towards strategic autonomy. You can also gain direct exposure through specialised sector-focused ETFs.

Table 1: Saxo “European Independence” equity basket

Below is a curated list of European companies, ordered by sector and their alignment with Europe’s drive toward independence. The companies on the list were selected based on their sector alignment, market capitalization, and Bloomberg analyst consensus score (at least 3.5 out of 5), ensuring strong market confidence. A qualitative assessment confirmed their strategic relevance to key sectors driving European independence, including defense, industrials, energy, infrastructure, and technology. As of March 19, 2025.

Note: The stock list provided is for informational purposes only and does not constitute investment advice or specific recommendations. Investors should conduct their own research before making investment decisions.

2. European banks—positioned for profitability

• Overweight: European banks are poised to benefit significantly from Europe's robust fiscal expansion. Attractive valuations, improved credit conditions, and higher interest margins make this sector appealing as Europe's economic recovery gathers momentum.
• Risk to watch: European banks face risks from geopolitical tensions, stricter regulations, and economic slowdowns, which could strain balance sheets and profitability. Delayed stimulus measures could impact lending growth.
• How to play it: One way to gain exposure could be via the Amundi STOXX Europe 600 Banks UCITS ETF, capturing diversified sector benefits as Europe's economy recovers.

3. Health care—defensive stability amid economic uncertainty

• Overweight: Health Care remains one of the best-performing global sectors year-to-date, reflecting investor preference for defensiveness amid economic softness and uncertainty. Supported by structural tailwinds such as ageing demographics, health care provides attractive stability, consistent cash flows, and dividend resilience, making it especially appealing amid rising recession risks.
• Risk to watch: Policy risks, such as potential drug price regulation or changes in government healthcare spending, could impact sector profitability. Rising competition, particularly in high-growth areas like obesity treatments.
• How to play it: Consider an ETF with global exposure to the sector. An example of such is the Xtrackers MSCI World Health Care UCITS ETF, providing broad exposure to global health care sector.

4. Chinese equities—leveraging domestic consumption

• Overweight: China's new domestic consumption-driven growth strategy and government stimulus offer attractive opportunities in consumer and technology sectors, especially given appealing valuations.
• Risk to watch: Investors should remain selective as structural challenges persist—notably within the fragile property market and ongoing geopolitical tensions. Regulatory uncertainties could also limit foreign investor confidence and disrupt growth.
• How to play it: As an example, investors can gain exposure through an ETF such as the iShares MSCI China UCITS ETF, which offers diversified access to Chinese companies positioned to benefit from domestic consumption-driven growth in response to China’s new policy direction.

Conclusions

The Saxo Radar Q2’2025

Highlights key market drivers, mapping them by impact and likelihood. Offers a quick, snapshot of potential risks and opportunities, helping investors navigate what’s ahead.

Please note:
The ETFs mentioned in this article are provided for informational and inspirational purposes only. They have been selected based on their exposure to the relevant asset class or market theme, as well as their liquidity and pricing. These ETFs are intended as examples only—other financial products with similar exposures may be available. Investors should conduct their own research and consider their individual financial circumstances before making any investment decisions.