From a multi-asset investment perspective, a de-globalised world necessitates enhanced portfolio diversification.

The US has threatened to impose significant tariffs on several trading partners beginning on August 1st. The impacted countries are predominantly in Asia, notably Korea and Japan, but South Africa is also included. Such a move was not unexpected. Markets are understandably pricing a significant probability that this is again a negotiating tactic, and that a delay or ‘deal in principle’ is announced before the tariffs come into effect.

The uncertainty and reality of higher tariffs, slowing labour force growth, combined with the upward impact of fiscal deficits on interest rates, is expected to lead to subdued growth and sticky inflation in the US, and could cause investors to look outside of the US for areas with a resilient growth outlook and reasonable valuations.

Stuart Rumble, head of investment directing, APAC, Fidelity International, comments: “The idea of US exceptionalism has shaped the way investors allocate capital across global markets for at least a decade. Today, that assumption is being reassessed. A combination of shifting trade dynamics, fiscal uncertainty and evolving currency pressures is prompting investors to take a broader view of where to find sustainable sources of growth and income.

Recent fund flows suggest a quiet but deliberate rebalancing may be underway. Equity exposure is being reconsidered, with many investors looking to reallocate capital to markets such as Europe, Japan and other parts of Asia. Within portfolios, we are seeing a move to reduce reliance on large US technology firms and to increase diversification across sectors that offer comparable growth and quality characteristics at more attractive valuations, including growing interest in Asian equities aligned with strategic trends such as AI, energy transition, advanced manufacturing and domestic consumption.

In fixed income, there is increased interest in rotating toward high-grade sovereign bonds in Europe and Asia, along with rising appetite for local currency debt markets across the region. Currency strategies are also evolving. Where applicable, investors are considering the approach and timing of hedging their US dollar exposure and increasing allocations to other reserve currencies and those likely to benefit from regional repatriation flows.”

Joseph Zhang, portfolio manager, Fidelity International, comments: “The US equity market has been benefiting from a valuation premium compared to the rest of the world, a situation justified by its superior earnings growth, improving profit margins, and leadership in innovation. Additionally, the US bond market has attracted substantial capital owing to its market depth and liquidity, stable rule of law, and the US dollar’s status as a global reserve currency. This sense of “exceptionalism” has also bolstered the strength of the US dollar, as the surplus dollars from the twin deficits are reinvested into US financial assets.

Nevertheless, some significant changes are prompting global investors to reassess the sustainability of this “exceptionalism.” In a world characterised by de-globalisation and supply chain fragmentation, can US companies sustain their superior earnings growth and margins compared to the rest of the world, and as capital flows begin to shift, will the decade-long cycle of USD strengthening reverse? Ultimately, it raises the question of the appropriate level of “valuation premium” that should be attributed to US assets.

From a multi-asset investment perspective, a de-globalised world necessitates enhanced portfolio diversification, encompassing equity regional diversification, bond diversification, and currency diversification. For instance, whereas investors previously sought AI-related exposure primarily in the US market, they now have a wider array of opportunities to discover promising companies in Asia and China, often at more attractive valuations. In terms of fixed income, the de-synchronised rate cycle and attractive yield present good investment prospects in emerging market bonds. Improving currency diversification with non-USD exposure both in major DM currencies, selective EM currencies and gold also helped improve portfolio stability.”

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