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Upending the global order at blinding speed
John J. Hardy
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We are witnessing a once-in-a-lifetime shredding of the global order. As the new order takes shape, ...
Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever
Quarterly Outlook
Jacob Falkencrone
Global Head of Investment Strategy
Key points:
- Diversification is critical: After years driven by a handful of US tech giants, broad diversification across sectors, regions, and asset classes is essential for navigating increased volatility and uncertainty.
- Equities remain attractive—but brace for volatility: Despite recession risks and geopolitical tensions, equities still offer upside. However, the easy returns of recent years are gone. Investors must be selective and ready for swings.
- Look beyond the US: Compelling investment opportunities are emerging outside US markets and tech, particularly in Europe and China, as the global economic landscape shifts.
Setting the scene: US exceptionalism faces reality
Investors entered 2025 confidently betting on continued US exceptionalism, encouraged by optimism around further pro-business Trump policies, deregulation, tax cuts, and the powerful AI-driven tech rally.However, reality has quickly set in. Aggressive tariffs, geopolitical tensions, reshaped trade alliances, and a push for rapid re-industrialisation have unsettled markets, while the concentrated rally in mega-cap technology stocks has lost momentum. The traditional US role as a global economic anchor is being challenged as growth moderates sharply, with business and consumer sentiment reflecting heightened recession concerns, further amplifying market volatility.
The once-clear path of investing—simply investing in a handful of leading tech giants and expecting automatic growth—has become far more complicated and uncertain. The era of easy performance may be behind us, and after two years of exceptional equity returns north of 20%, markets now face the essential reality check. It's time for investors to adjust expectations.
Having said that, we still see opportunities for upside in equities going forward. These will, however, likely be harder to achieve and more volatile.
Diversification – your best defence as volatility persists
After years of extraordinary gains driven by a handful of tech giants, diversification has become essential. Market volatility is surging, fuelled by escalating geopolitical tensions, recession fears, and aggressive US policies reshaping global trade relationships. The concentrated returns of previous years now pose significant risks, making it more important than ever to build a well-balanced portfolio.We expect high volatility to persist. But volatility isn’t solely negative—it’s often the price investors pay for future returns. To navigate the current environment, investors must thoughtfully diversify, looking beyond the US and the Magnificent 7 toward the Magnificent 2,645—the total number of companies represented in the MSCI All Country World Index. Diversifying widely across sectors and regions significantly reduces risk, smooths returns, and helps portfolios withstand market shocks.
In Europe, the shift toward strategic autonomy—driven by geopolitical uncertainty and substantial fiscal stimulus—makes European equities particularly appealing. Meanwhile, China’s pivot toward domestic consumption-driven growth creates opportunities in select sectors.
But diversification isn’t only about equities. High-quality fixed income—such as government, inflation-linked, and investment-grade bonds—plays a critical role in portfolios during periods of heightened volatility. With recession risks rising, allocating to fixed income is essential for reducing volatility, preserving capital, and providing dependable returns, especially if economic conditions worsen. Bonds act as a stabilising force, offsetting equity losses during downturns and enabling investors to stay invested rather than panic during volatile market swings.
Building a long-term portfolio: navigating volatility and risk
To combine the stability of broad diversification with the flexibility to capture compelling short-term opportunities, investors can consider a core/satellite approach to portfolio construction. A typical example might be an 80/20 split between the core and tactical positions.
Core portfolio (approximately 80%): The core—representing around 80% of the total portfolio—is designed as a diversified "all-weather" foundation. It aims to balance risk across asset classes and regions, providing long-term resilience and helping protect against market shocks and economic disruptions.
Tactical satellites (approximately 20%): The remaining 20% can be allocated to high-conviction tactical ideas with strong short- to medium-term potential. These satellite positions are meant to capitalize on evolving market trends, sector rotations, or macroeconomic shifts—without compromising the overall stability of the portfolio.
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
Despite growing risks, we still see markets moving higher, but expect high volatility along the way. Investors face a rapidly evolving environment defined by elevated recession risks, geopolitical disruptions, and shifting fiscal policies. Strategic diversification, defensive positioning, and selective international exposure will be crucial to navigate the volatility and uncertainty ahead.In this transformative environment, maintaining flexibility and discipline is crucial. The easy gains of yesterday have given way to a more challenging, yet still opportunity-rich, investing landscape. Ensure your portfolio is ready. In ensuring this, thoughtful diversification isn't just prudent—it’s essential.
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.
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