Monthly house view | May 2025

Context

And then there was calm. Relative calm, for now. The hurricane unleashed on global markets by President Trump’s sweeping trade tariffs, announced on 2 April, has turned into more of a regular storm thanks to a pause on the imposition of the levies for most countries, and a US-China deal to slash duties for 90 days. Exemptions for some goods also help. However, the original tariff announcements along with Trump’s attacks on Federal Reserve Chair Jerome Powell have left enduring damage to the United States’ international reputation, even if the aggression has softened recently.

The result is weakened confidence – both among businesses and consumers – and a fragility in markets that leaves them prone to volatility. Leading companies are laying off workers and grappling with supply chain issues, and many are unable to provide guidance as they simply don’t know what to expect. The uncertainty is also gripping US households, who have front loaded some purchases, worried that prices will rise. Though deregulation and tax cuts may help in time, the world’s largest economy is by no means out of trouble yet and recession remains a risk, albeit a diminished one. The uncertainty will stunt corporate profits this year and warrants caution with more risky assets, and US equities in particular. At the same time, easing price pressures in the euro area create room for interest rate cuts, increasing the appeal of Euro Investment Grade bonds.

Tectonic shifts

The tariffs reinforce a tectonic shift underway in the global economy. The post-war architecture – under which the US delivered economic stability, security guarantees and superior returns in exchange for foreign capital – is faltering as US policies undermine trust in the world’s largest economy. Given the large accumulated foreign holdings of US assets, capital repatriation from the US is a growing risk. In parallel, Germany’s new readiness to engage in fiscal spending is a potential ‘game changer’ moment that could spill over across Europe, driving a structural revival that is already being supported by lending growth and easing monetary policy. In China, the government is ready to play hardball with the US on tariffs. This reflects a new-found confidence in its role as a global powerhouse, emboldened by tech sector successes that make some of its companies more competitive against their US peers.

Investment implications

In turbulent times, it pays to assess the big picture and remain composed. Our core positioning is crucial for portfolio resilience and is set to seize on the opportunities we expect our base case scenario will present. Our convictions around specific markets and segments should enable investors to generate additional value. Moreover, retaining some flexibility gives investors scope to react to unexpected surprises.

3 things you need to know

1. Hurricane fades

• The hurricane unleashed on markets by the 2 April tariffs has eased into a storm thanks to a pause on tariffs for most countries and early negotiation talks
• China and US agree to lower tariff levels for 90-day
• However, the tariff announcements and attacks on Fed Chair Powell have left lasting damage, even if the aggression has softened
• Uncertainty is high and a US recession remains a possibility. Many companies have stopped issuing guidance as they don’t know what to expect

2. Tectonic shifts

• The tariffs reinforce a tectonic shift underway in the global economy
• Innovation by Chinese tech companies is paying off, making some more competitive against US peers
• The post-war global architecture is faltering as US policies undermine trust in the world’s largest economy
• Capital repatriation from the US is a material, growing risk
• This is negative for the US dollar against other currencies

3. Europe as an alternative

• The uncertainty around US policy is likely to negatively impact risky assets and in particular US Equities
• Broader Europe is experiencing a structural revival supported by a boost in funding, lending growth and easing monetary policy
• Downward price pressures in the euro area contrast with the US and give room for the ECB to cut rates