After the Plateau: Positioning Portfolios for the Post-Tightening Cycle
With major central banks now firmly in pause mode, the next 18 months will reward duration, quality credit, and disciplined re-risking — not heroics. A note on how we are sequencing additions across client portfolios.
The most consequential moment in any tightening cycle is rarely the last hike. It is the long, quiet plateau that follows — when terminal rates have been reached, but the cuts that markets keep pricing in have not yet arrived. We are squarely in that window.
Across the Federal Reserve, ECB, Bank of England and Bank of Canada, policy rates have now been on hold for three consecutive meetings. Forward curves continue to flirt with a first cut by late summer, but the data — sticky services inflation, resilient labour markets, and stubbornly positive real wage growth — is not yet cooperating. We are positioning for a longer plateau than the consensus, with our base case for the first cut now sliding into Q4 2026.
What that means for portfolios is straightforward, even if it is unfashionable. Duration is no longer a contrarian trade — it is a carry trade. Investment-grade credit yielding 5.4% to 6.1% does not need a rate cut to deliver an attractive total return; it simply needs the absence of a recession. We have been steadily extending duration in client mandates from a benchmark-neutral position to roughly 0.6 years long, concentrated in the 5- to 10-year part of the curve.
On the equity side, we are resisting the urge to re-risk into the obvious leadership of the past 18 months. Mega-cap technology has done the work; the next leg, if it comes, will be carried by quality cyclicals, healthcare innovators with durable pipelines, and a select group of European industrials trading at meaningful discounts to their US peers. We are adding modestly, slowly, and with explicit stop-loss discipline.
The risk we are watching most closely is not the recession that everyone has been forecasting since 2023. It is a credit event in private markets — specifically in the parts of private credit that have grown fastest and underwritten loosest. Our underweight to broad-based private credit funds remains in place; selective direct-lending exposure with conservative covenants stays.
- Extend duration modestly into the 5–10 year part of the curve — carry, not capital gains, is the trade.
- Re-risk equities slowly into quality cyclicals and European industrials, not back into mega-cap tech.
- Maintain underweight to broad private credit; selective direct lending with strong covenants is acceptable.