Saxo Q4 Outlook: Diversify like it’s 2025
Don't fall for déjà vu
Diversification beats déjà vu. The danger now is not missing out on what has worked but being overexposed to it. - Jacob Falkencrone, Saxo
Key points:
- Diversification 2.0 – With 60/40 broken and volatility likely to stay high, investors need to think differently and diversify beyond just stocks and bonds.
- Equities remain the engine – Opportunities are still there, but US tech dominance makes selectivity key. Balance it with Europe, Asia and small-caps to broaden portfolio strength. (see 5 key bets below)
- Don’t predict, prepare – Build resilience through quality equities, steady income from mid-curve bonds, and gold as a core portfolio stabiliser.
As investors step into the final quarter of 2025, the mood could hardly be more conflicted. Equity indices hover near record highs on the back of an AI-fuelled earnings boom, yet consumer sentiment remains close to historic lows, bond markets no longer behave like shock absorbers, and geopolitics hums at a low but constant frequency. In other words, it feels both like the best of times and the worst of times – just as Charles Dickens famously wrote.
For investors, the challenge is not predicting which version of reality will prevail but ensuring their portfolios can withstand either. That is where diversification comes in. Yet the classic definition of diversification – a simple mix of equities and bonds – has been losing its effectiveness. Correlations between stocks and bonds have risen, the concentration of returns in US mega-caps has left many portfolios dangerously narrow, and years of cheap money have made it harder to judge what risks were really worth taking.
This quarter demands a fresh playbook. Call it “diversification 2.0”.
“In investing, winter always comes. The portfolios that survive are those built for all seasons.” - Jacob Falkencrone, Global Head of Investment Strategy Saxo
Why the old 60/40 no longer protects
For decades, the 60/40 portfolio of stocks and bonds was considered the gold standard of balance: when equities fell, bonds usually rallied, cushioning losses. That relationship has weakened. Inflation and high government debt have meant that bonds often move in the same direction as equities, amplifying rather than offsetting risk.
The implication is clear. Diversification today is not just about holding more assets but about holding the right ones. Investors must look across regions, sectors and risk drivers, not simply assume that yesterday’s hedges will work tomorrow. And with markets stretched, policy and trade uncertainty in the US still unresolved, and geopolitical risks simmering, volatility is likely to stay elevated through the rest of the year.
Equities: breadth, value and proof of earnings
Equities remain the core engine of portfolios, but risks remain: US valuations are stretched, AI earnings delivery is not guaranteed, and geopolitics could flare up unexpectedly. Equities still offer opportunities, but it takes greater selectivity to capture them.
The US equity market remains the global benchmark, but its leadership has narrowed dramatically. A handful of technology and AI giants have carried index performance, while much of the market has lagged. This creates both concentration risk and valuation risk.
The AI revolution still provides a powerful growth narrative, but the market has entered phase two. The first wave of AI winners – semiconductors, power suppliers, data centres – has already delivered extraordinary returns. But expectations are running ahead of earnings, and the next phase will be about proof: which firms can turn AI into real revenues and productivity gains.
This is becoming a two-track AI story: the US remains the frontier leader, while China is playing catch-up at home with scale and efficiency, supported by policy. Both offer opportunity, but in very different ways.
“AI hype without EPS delivery is a sugar rush. Earnings are the true test of durability.” - Jacob Falkencrone, Global Head of Investment Strategy
Europe is one area that stands out. Valuations remain well below US levels, even as governments embark on a historic fiscal pivot towards defence, infrastructure and energy independence. After a flat 2025, earnings are expected to rebound in 2026, supported by policy easing and fiscal support.
Asia also looks promising. Japanese equities continue to benefit from corporate governance reforms and a shareholder-friendly tilt that is transforming what was once considered a value trap into a more compelling growth story.
China, meanwhile, remains a balancing act. Its property sector is still under strain and regulation can be unpredictable, but it is also the world’s second-largest economy and a global leader in electric vehicles, green energy and advanced manufacturing. For investors, the key is to be selective: broad exposure to the whole market carries risks, while targeted allocations to China’s “new economy” sectors can add growth potential that is missing elsewhere.
Emerging Asia — from India’s digital boom to Taiwan’s and Korea’s dominance in AI hardware — is also under-represented in global benchmarks but provides exposure to sectors missing in Western markets. MSCI World, for instance, gives only around 8% to developed Asia and none to China, India, Taiwan or Korea, despite Asia accounting for roughly 40% of global GDP.
India deserves special mention. Despite tariff tensions and premium valuations, the country’s combination of digitisation, demographics and resilient banks keeps its earnings outlook intact. The key is to stay allocated but lean towards domestic-demand themes, while monitoring exporters more exposed to global headwinds.
Small-cap equities are also worth a closer look. US small-caps, particularly the profitable subset captured in the S&P 600 index, trade at significant discounts to their large-cap peers. With borrowing costs expected to edge lower in 2026 and domestic demand proving resilient, these companies could see outsized rebounds. But small-caps are higher risk: broad indices like the Russell 2000 include many loss-makers. That’s why focusing on profitable quality screens is crucial.
Bonds for income, gold for resilience
Bonds are back on the radar, but not as the automatic hedge they used to be. Today, they should be seen mainly as a source of steady income. The sweet spot lies in the middle of the yield curve – maturities of three to seven years. These bonds pay attractive yields without the sharp swings of very long-dated debt, which is more exposed to inflation surprises and government borrowing. For investors, this part of the market offers a practical way to earn income while keeping risk manageable.
With bonds less reliable as shock absorbers, investors also need stabilisers that behave differently. Gold has reasserted itself as a core stabiliser, hitting record highs this year. With debt burdens heavy and traditional bond hedges less reliable, it stands out as one of the few assets that can consistently protect a portfolio in multiple scenarios. Silver and platinum, supported by industrial demand, add further diversification.
The risks? Inflation could prove stickier than expected, keeping yields higher for longer and capping bond returns. And if real yields remain positive while markets stay calm, gold may lag behind equities. But with rate cuts on the horizon, cash yields will fade, while mid-curve bonds and gold could gain appeal as portfolio anchors.
A new playbook for investors – five key bets for Q4
So, what does diversification 2.0 look like in practice? Here are five key bets for Q4.
1. Europe
Europe is launching a huge investment drive in defence, energy independence and infrastructure. Valuations remain cheaper than in the US, and investors globally are underweight. After a flat 2025, earnings are expected to rebound in 2026, supported by policy easing and fiscal support. The risk is that a stronger euro or weaker global demand drag on profits, or that political will for fiscal expansion fades.
How to get exposure: broad European equity funds or ETFs, with added focus on industrials, financials, and infrastructure companies.
2. Asia (China, Japan, India)
Asia remains the world’s growth engine and has a robust earnings backdrop into 2026. Japan is reforming corporate governance and returning more to shareholders. India combines fast digital adoption with favourable demographics. China still carries risk, but selective exposure in technology, electric vehicles and green industries offers opportunity. Emerging Asia also plays a central role in the global AI supply chain, from Taiwan’s chipmakers to Korea’s memory leaders — areas that global benchmarks often underweight. The main risk is political and regulatory uncertainty, which can shift quickly.
How to get exposure: regional Asia ex-Japan funds, plus targeted country funds for Japan and India. For China, stick to diversified vehicles that tilt toward new-economy sectors.
3. Small-caps
Smaller companies have lagged during the period of high interest rates, but many are now cheap compared with large-caps. Earnings growth could rebound sharply if financing costs ease, but smaller companies are more vulnerable to downgrades if conditions tighten. They provide exposure to domestic economies rather than just global giants. The key is to focus on profitable quality, not broad loss-making indices.
How to get exposure: US small-cap indices like the S&P 600 (quality screen) or global small-cap funds with a profitability filter.
4. Bonds in the “belly of the curve”
With interest rates still high but likely to ease in the coming year, the most attractive part of the bond market is the middle — maturities of around 3–7 years. These bonds provide steady income without the volatility of long-dated debt. The risk is that inflation proves stickier than expected, keeping yields higher for longer.
How to get exposure: investment-grade government and corporate bond funds or ETFs focusing on 3–7-year maturities.
5. Real assets — especially gold
With bonds less reliable as portfolio protection, real assets play a bigger role. Gold has reasserted itself as a stabiliser, benefiting both in times of crisis and when inflation runs hot. The risk is that if real yields remain high and markets stay calm, gold can lag equities.
How to get exposure: physical gold ETFs, diversified commodity funds, or a small direct allocation to bullion.
Diversification as survival
Diversification is often dismissed as a cliché, but in 2025 it is not just prudent – it is survival. The months ahead could bring a soft landing, an inflation comeback, or a geopolitical shock. No one can predict which, but investors can prepare by diversifying across different risk drivers, not just asset classes.
That is the essence of diversification 2.0: proof of earnings from AI, steady income from mid-maturity bonds, and resilience from gold. Above all, portfolios must be built to survive not just the next quarter but the next storm.
Sven Watthy
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