Mitigating European political risk

Quintet recommends a moderately pro-equity, defensive bond allocation that reduces exposure to European political risk while retaining support from US growth and AI investment.

• France’s 2027 presidential election, alongside elections in Italy in 2027 and Spain in November 2026, could increase uncertainty around European government bonds through fiscal sustainability, political fragmentation and economic-policy risks.
• Quintet is cutting European government bonds from overweight to neutral because France, Italy and Spain have high debt levels that could limit fiscal responses and prompt investors to demand higher yields.
• US Treasuries are being raised to a moderate overweight, with the dollar exposure hedged into euros or sterling, because Quintet sees fewer immediate political and fiscal risks in the US bond market.
• US midterm elections could constrain new spending, while the absence of further expenditure initiatives could prevent additional budget deterioration or produce moderate consolidation, although it would not quickly reduce the deficit.
• Global growth and corporate spending remain resilient, the US continues to lead, and AI investment is supporting capital expenditure, technology demand and earnings; Quintet therefore continues to favour equities over bonds and maintains a tactical overweight to gold.
• Higher oil prices and geopolitical tensions may lift headline inflation, but underlying inflation is closer to central-bank targets than in 2022, so any further rate increases by the Fed, ECB and BoE are not expected to reproduce the rapid tightening cycle that followed the pandemic.

Takeaway: Investors should reduce European government-bond exposure and shift part of the allocation to currency-hedged US Treasuries while maintaining moderate equity and gold exposure, with the main risks being renewed inflation, geopolitical escalation and European fiscal stress.