Horizon 2025 - Turning inward
Retrenchment
Retrenchment, rather than collaboration, is the theme of the emerging world order. In this new, deal-orientated era, in which the guardrails of multilateralism are falling away, countries must assess their capacity to look after their national interests and – where they identify deficiencies – redress them by forming alliances, often with their neighbours. This is driving a structural shift towards greater regionalism and away from globalism in geopolitical alliances and, by extension, in economic relationships.
In this context, our 2025 Horizon outlook revisits long-term economic and asset class forecasts and delves into some of the key topics we expect to drive markets over the coming years.
Under the old framework, the US delivered economic stability, security guarantees and superior returns in exchange for foreign capital. The compelling, low-risk returns that the US offered under this set-up attracted capital from the rest of the world, allowing the US to accumulate its twin current account and fiscal deficits. As a result, the US net international investment position is negative and represents USD 27 trillion, or 90 percent of its GDP. Now, faltering international trust in that arrangement, exacerbated by the US tariffs policy, is increasing the risk of capital repatriation from the US. Indeed, raising US tariffs with a view to addressing perceived trade imbalances implies a reversal of trade flows, which may in turn bring a reversal in capital flows. At the same time, US ambivalence about its commitment to acting as a guarantor of peace and stability has implications for security policy. This is a big driver of change for NATO in Europe, where countries are increasing the share of national output they spend on defence. The latest spending commitment by NATO leaders includes 3.5 percent of GDP dedicated to core military capabilities and 1.5 percent going to security-related infrastructure projects. This increased government spending will act as fiscal stimulus, helping to support Europe’s revival. The increased defence spending goes hand in hand with a new fiscal stance in Germany, Europe’s largest economy. Aiming to hit the 3.5 percent of GDP defence spending goal before many other European countries, Germany is showing a new readiness to engage in fiscal stimulus – a potential “game changer”moment that could spill over across Europe, where lending growth and easing monetary policy are supporting a broader structural revival.
Tectonic shift
Taken together, the shift in US posture vis-à-vis the rest of the world and the European revival represent a shifting of the tectonic plates in the global economy and financial markets. This has already seen some foreign funds flow out of the US . The clearest manifestation of financial markets’ concerns about the new US posture – both the threats to international cooperation and to checks and balances at home – is the weaker dollar. Long the world’s ultimate safe haven and global reserve currency, investors are starting to question its status.
The shifting international framework has investment implications. Europe’s revival means global investors have more alternatives when considering their long-term currency, fixed income and equity asset allocations. Asset allocation decisions made for the coming 10 years are likely to be different to those made for the past decade.
Navigating the new era will require a careful, strategic approach, with an awareness of the risks. Investors face a volatile macroeconomic environment in the coming years amid uncertainty about the potential for trade friction to fuel inflation, and upward pressure on long-term interest rates from investors concerned about fiscal sustainability, with both the US and Europe projected to experience increasing debt levels. In the US , the passing of the One Big Beautiful Bill Act (OBBBA), which the Congressional Budget Office (CBO) estimates will add more than USD 3.3 trillion to the national debt by 2034, has added to concerns about the long-term sustainability of the US fiscal position. In this context, the term premium – the extra return that investors expect for holding longer-term bonds compared to holding a series of shorter-term bonds over the same period – is likely to continue rising over the long term. At the same time, the long-held notion that risk-free interest rates are represented by US short-term Treasury Bills is a concept that should now be challenged.
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Technology race
The tectonic shifts in the global economy extend to Asia too, where the US emphasis on unilateralism and an “America First” approach means countries such as Taiwan, Japan and South Korea must reconsider their geopolitical risk situation. A reduced US presence in Asia would create space for regional powers to assume greater responsibility in shaping the region’s security architecture. China has already expanded its influence through initiatives like the Belt and Road Initiative (BRI ) and could play a more assertive role in the region, particularly with regard to the Taiwan Strait and the South China Sea. Japan and South Korea, long-standing US allies, may seek to diversify their strategic partnerships while enhancing their own defence capabilities.
The adjustments in US engagement in Asia coincide with technological advancements in China that exacerbate the Chinese-US rivalry. China’s innovations in Artificial Intelligence (AI) present countries with a stark choice that will define their technological independence, political alliances and economic future. They find themselves with the choice to align with US or Chinese technology, or else attempting the delicate dance of using both. It is a complex calculation with profound consequences, particularly for those countries in the “non-aligned” camp between East and West. This divide will extend beyond hardware to digital governance, data security and cyber norms, forcing countries to make difficult choices that could shape their economic futures.
The race for ascendancy in technology extends to electrification, which is being spurred on by global warming. Countries are progressing at different speeds in this domain – particularly when it comes to electric vehicles (EVs). Thanks to a highly proactive policy, China has established uncontested leadership in almost every segment of the energy transition value chain, including EVs. The West risks further losing out if it fails to implement the right industrial policies, leaving an unbridgeable technology gap with the Chinese.
The world’s economies face this volatile economic outlook, laced with geopolitical rivalry, at a time when they are grappling with growing demographic challenges at home. Population decline and shifting migration patterns are combining to alter growth prospects, labour markets and inflation dynamics across regions. These pressures will reshape economies in the coming decades. Those that thrive will find new ways to grow with fewer workers, more retirees, and a rapidly changing global landscape.
In conclusion, we are convinced that understanding the risks and opportunities of this changing world order will be crucial for those involved in asset allocation and portfolio construction in the coming years. We believe the starting point of any investment journey should be to grasp the interconnection of the rapid changes in the geopolitical, financial and technological landscape that we are experiencing in the world post-Pax Americana.