Tariffs and tailwinds: how to invest in H2 2025

US policies are rewriting the global rules. Are investors ready for a reset?

Recent trade deals have resolved some uncertainties, and companies have front-loaded some of their activity. But the shock from tariffs is only delayed. The fuller impact should become clearer soon, as the US economy slows. The first signs are already visible in a weakening job market and rising goods inflation. But a period of below-potential growth, more restricted trade and immigration should not trigger a US recession, as long as employment and corporate profitability stay resilient.

Monetary policy support is near, and we think the Federal Reserve set to cut its policy rates three times this year. Inflation should rise towards 3.3% by late 2025, not enough to derail the Fed’s easing path.

Europe’s trade deal with the US has removed a major cloud from the horizon and Germany’s fiscal boost should support growth. With the economy now on a slightly stronger footing, the European Central Bank should keep rates at 2%. The Swiss National Bank has also likely completed its easing cycle, although US tariffs may still weigh on growth. Switzerland has ample fiscal room to support its economy, and negotiations should soften US duties.

Globally, tariffs have so far inflicted less damage than anticipated. But the burden will get heavier

Meanwhile, the tariff truce with the US and further fiscal stimulus should support China’s growth this year. This will help emerging markets, which are also benefitting from a weaker US dollar, more tariff clarity and rate cuts in some economies.

Globally, tariffs have so far inflicted less damage than anticipated. But the burden will get heavier. And even if the global economy shows resilience, protectionism is creating new weaknesses, and asking more of investors.

The real test for investors is still ahead of us. It’s hard to overstate just how radically US policies have shifted, and yet, equity markets have powered through huge shocks towards new highs. And that creates vulnerabilities.

So why do we stay invested? Markets have been focusing on the good news, solid corporate earnings and lower tariffs than feared. There may be some complacency. But lower interest rates should support stock valuations, while corporate earnings should keep growing through the slowdown. The tailwind from the roll out of AI and the capital expenditure behind it will keep markets on track.

There is still more upside potential in stock markets, but we must strike a fine balance in our portfolio positioning

There is still more upside potential in stock markets, but we must strike a fine balance in our portfolio positioning.

In equities, we have taken profits on developed market stocks, and now favour emerging markets. Here, earnings growth should be stronger and valuations are lower. A weaker US dollar should help attract more inflows from foreign investors. In sectors, we prefer communications services, where companies are benefitting from the positive dynamics driving tech, including AI. We also like utilities, which are capitalising on rising power demand.

In fixed income, we have increased our exposures to emerging market hard currency bonds, which offer attractive returns and stable spreads. We also favour investment grade bonds, where yields are well above their medium-term averages.

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In currencies, we see risks ahead for the US dollar from slower growth, a weakening job market and a Fed easing cycle that is much later than other major central banks. Fiscal concerns are also weighing on the currency and will limit long-term US bond yield declines compared to other shorter maturities. We keep our allocation to gold at neutral levels, as a useful portfolio diversifier.

Major crises often prove to be buying opportunities

US policies are rewiring the world economy, tilting the geopolitical balance of power, and reshaping investment opportunities. The biggest risk is a US recession – and that is not our base case.

It’s therefore important to stay invested through turmoil, with measured risk taking in portfolios. Major crises often prove to be buying opportunities, as long as the main economic blocs continue to expand, even modestly.