Steering portfolios through a new world (dis)order

Trump 2.0 is turning out very different from markets’ expectations after Trump 1.0.

A slowing US economy is the first casualty of policy uncertainty. Companies are investing less. This is an early effect of the trade war as businesses are faced with tariff unpredictability.

Does that mean we see a US recession ahead? Put simply, no. This cycle has not ended, because the US economy has been running on two engines, corporate and consumer spending. While businesses are hesitant to invest, consumption trends remain healthy.

US growth may slow this year to just under 2%, still far from recession. The Federal Reserve continues to manage the trade-off between downside employment risks against upside inflation risks, mainly from tariffs. We expect two cuts in 2025, which would take the Fed’s terminal rate to 4% at the end of the year.

Meanwhile, Europe is at a tipping point. Geopolitical pressures have catalysed fiscal ambitions, changing decade-old policies in weeks. Fiscal plans from Germany and Europe should improve the long-term outlook for the region, as they radically break from decades of underinvestment. In the years ahead, this spending should translate into a more profound economic boost for Europe.

Potentially we’re at the start of a significant European growth story. Can the region afford it? Absolutely

Meanwhile in China, stock markets recorded gains thanks to the tech sector, and the government announced new policy targets. We think it will be difficult for China to defend its official 5% growth target for 2025, as US and other tariff restrictions will hurt exports.

Things are moving fast, so how is this environment reshaping the investment outlook?

Markets had priced in positive impacts from the new US administration. Now, they are coping with erratic and unpredictable policy-making, and volatility has risen significantly.

Markets had priced in positive impacts... Now, they are coping with erratic and unpredictable policy-making

Macroeconomic conditions, earnings growth and liquidity are all still supportive of risk assets. We see more upside, notably in stock markets. But to weather short-term uncertainties, we have lowered global equities to neutral levels, by reducing our positions in US equities to neutral.

European equities have outperformed so far this year. The region is emerging as an attractive investment destination thanks to appealing valuations and the promised fiscal spending. This is a fundamental shift that could lead to further rebalancing of global equity portfolios, which in recent years have heavily relied on US returns.

This shift could lead to further rebalancing of global equity portfolios, which in recent years have heavily relied on US returns

In fixed income, we hold overall exposures at neutral levels. We are still underweight government bonds, where we like the 5-to-7 year maturities, and where now is a good time to lock-in more elevated yields. We also favour the higher yields available from corporate bonds.

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The world and global economy are undergoing profound shifts and visibility is poor. We think the best portfolio response is a high degree of portfolio diversification, supported by higher liquidity that allows us to deploy capital as soon as conditions warrant adding risk again.