Seema Shah

Global bond markets have sold off sharply in recent weeks, pushing long-end yields to multi-decade highs across major markets. U.S. 30-year yields hit their highest level since 2007, 30-year JGBs since their introduction in 1999, UK gilts since 1997, and German bunds since 2011.

This is not a series of isolated market moves. Rather, global bond markets are repricing a shared set of risks: stickier inflation, expansionary fiscal policy, and elevated geopolitical uncertainty with a prolonged closure of the Strait of Hormuz. Together, these forces, further reinforced by strong U.S. growth, are eroding confidence in the path towards policy easing and pushing yields higher globally.

Key market drivers

Rising inflation pressures

Higher energy prices are beginning to feed through into inflation. Headline U.S. CPI is running near 4% and producer price inflation near 6%, while rising freight costs suggest pipeline pressures have yet to peak. Importantly, although longer-term U.S. inflation expectations remain broadly anchored, early signs of strain are emerging. By contrast, inflation expectations in both Europe and the UK have already increased sharply.

Resilient U.S. growth

Growth remains robust. Consumer spending continues to hold up despite higher energy costs, while the capex cycle—supported in part by AI-related investment—continues to surprise to the upside. This resilience allows U.S. inflationary pressures to persist, sustaining upward pressure on yields.

Hawkish repricing of policy expectations

Markets have materially revised their outlook for central banks, shifting from expected rate cuts in 2026 to renewed tightening across several developed markets. In the U.S, stronger inflation data alongside firm growth has driven a significant shift in Fed expectations, with markets now assigning a material probability to a rate hike by year-end.

Fiscal concerns and rising term premia

Governments, including the U.S, are considering additional fiscal support to cushion the energy shock despite already stretched fiscal positions. This is contributing to higher term premia and reinforcing upward pressure on long-end yields.

Geopolitical risk premium

Markets are increasingly pricing in a prolonged Middle East conflict. The risk of sustained disruption to energy supply is embedding an additional geopolitical risk premium into yields.

Idiosyncratic factors

Local market dynamics, such as renewed UK political uncertainty over the possibility that Prime Minister Keir Starmer could be replaced by year-end, are adding to volatility. ¹

What could trigger a sustained bond rally?

A sustained reversal in the sell-off likely requires one of two developments:

• A meaningful slowdown in growth, sufficient to re-anchor expectations for policy easing; or
• A de-escalation in the Middle East, involving a reopening of the Strait of Hormuz and normalisation of oil flows.

With many investors positioned for further yield increases, a decisive geopolitical de-escalation could trigger a sharp rally in bonds, pulling both yields and oil prices lower and supporting risk assets. By contrast, a growth-driven decline in yields would likely come alongside weaker risk appetite.

Implications for equity markets

Equities have, so far, absorbed the rise in yields without too much damage. However, investors are increasingly concerned that rates are approaching levels that could challenge valuations. That said, the relationship between yields and equities is more nuanced than a simple “threshold” effect:

• The driver of yields matters: When yields rise on the back of stronger growth, equities tend to hold up well as earnings expectations improve. By contrast, supply-driven inflation, particularly via energy, pushes yields higher while compressing valuations, creating a more difficult backdrop for equities.
• The pace of the move matters: Even growth-driven increases can unsettle markets if they are too rapid.

Equities currently remain supported by strong earnings momentum. Global earnings-per-share expectations have been revised higher since the onset of the U.S./Iran conflict, reflecting continued strength in U.S. earnings and greater resilience in Europe than initially feared. This earnings cushion has so far enabled equities to absorb higher yields, contributing to the recent divergence between bonds and equities.

Looking ahead, U.S. equities should remain relatively resilient to rising rates, supported by strong earnings, the AI-led capex cycle, and lower direct exposure to higher energy costs. In Europe, by contrast, greater sensitivity to energy prices and weaker earnings momentum outside the energy sector leave equities more vulnerable to stagflation. That said, U.S. resilience should not be taken for granted: a further rise in energy prices—especially if it weakens growth and triggers a more hawkish Fed response—would put that relative strength to the test.

Investment considerations

Equities have so far been insulated from rising yields by strong earnings. However, the balance of risks is becoming increasingly finely poised, as higher rates, persistent inflation, and geopolitical uncertainty are beginning to challenge the durability of that support.

From a portfolio perspective, this environment argues for maintaining a more balanced and flexible stance:

• Stay selective in equities, favouring regions, sectors, and, importantly, companies with strong earnings visibility and pricing power, particularly those less exposed to energy shocks.
• Rebuild duration gradually, recognising that while near-term risks remain skewed to higher yields, higher starting yields are improving the medium-term case for bonds.
• Maintain exposure to inflation and geopolitical hedges, including energy and commodities, given the persistence of supply-side risks.
• Preserve optionality, as elevated uncertainty increases the likelihood of sharp, event-driven reversals across both rates and risk assets.

In this environment, portfolio resilience, rather than directional conviction, remains paramount.

 By Seema Shah, Chief Global Strategist

The post Rising global bond yields: The test for risk assets appeared first on AdviserVoice.

Seema Shah

The June CPI report came in as expected, bringing the annual headline increase to 2.7%, a tick-up from last month’s 2.4% reading. Meanwhile, core inflation rose 2.9%, softer-than-expected for the fifth straight month. The tariff-related impact on prices is gradually materialising, though its overall effect is offset by ongoing weakness in travel and tourism demand.

Report details

Monthly headline inflation rose 0.3% in June, as expected, with the annual rate accelerating to 2.7%—from 2.4% previously. Core inflation, which strips out food and energy, came in lower than expected, increasing 0.2% in June, with the annual rate rising to 2.9%. While the signs of the tariff-induced boost to overall inflation are still modest, trade policy remains a moving target. The fresh levies announced since the survey period for today’s inflation data suggest that the rolling impact of tariffs on prices should be increasingly felt in the months ahead.
Food prices increased 0.3% in June, with prices for food at home also rising 0.3% as three of the six major grocery store food groups increased. Driving the rise was a 0.9% increase in fruit and vegetables prices, which are highly vulnerable to tariffs. Moreover, this segment is also likely to be impacted by labor shortages amid heightened immigration enforcement, potentially putting additional upward pressure on consumer inflation expectations in the short term. Energy prices increased by 0.9% in June, amid a rebound in gasoline and fuel prices, likely due to the escalation of the Israel-Iran conflict in June.

Core inflation continues to be driven mainly by services prices, which rose 0.3% for the month. While shelter was the most significant contributor to overall inflation again this month, owners’ equivalent rent showed continued signs of softness, increasing only 0.3%, a downshift compared to the two-year average of 0.5%. Meanwhile, weakness in travel demand continued to weigh on airfares and lodging away-from-home prices, which declined by 0.1% and 2.9%, respectively.

Core goods prices rose 0.2% during the month, with the effect of tariffs increasingly felt in categories largely sourced abroad, such as household furnishings, recreational commodities, and apparel, which rose 1%, 0.8%, and 0.4%, respectively. Yet, the front-loading of both purchasing activity at the start of the year and lingering inventory drawdown likely contributed to a weaker tariff pass-through effect, particularly for autos, which saw new and used vehicle prices continue to fall, declining 0.3% and 0.7%, respectively.

The Fed’s preferred supercore inflation measure increased by 0.2%, bringing the annual rate to 3% from 2.9% prior. This measure excludes shelter from core services and is primarily driven by wage costs, which have declined since the middle of last year alongside a softer U.S. labor market.

Policy outlook

The Fed’s ability to cut rates rested heavily on today’s inflation print. With price pressures coming in softer-than-expected for the fifth month in a row, it may initially seem like there is still little sign of the tariff-induced boost to inflation that the Fed has been expecting. However, with increases in tariff-sensitive categories like household furnishings, recreation, and apparel, import levies are slowly filtering through to core goods prices.

Indeed, tariffs typically take several months to feed through inflation data, as the significant front-loading of imports implies that tariffs have still not been widely applied to many imported goods—yet. Moreover, the fluid nature of trade policy suggests that tariff levels may continue to fluctuate significantly. Overall, while any tariff induced boost to inflation is likely to be temporary, given the latest announcement of higher tariffs beginning in August, it would be wise for the Fed to remain on the sidelines for at least a few more months.

By Seema Shah, Chief Global Strategist

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Seema Shah

The U.S. administration has decided to delay its self-imposed deadline for implementing reciprocal tariffs until August 1. Reciprocal tariffs, originally announced on April 2, also known as “Liberation Day,” saw U.S. import tariff rates rise significantly for over 50 trade partners before being temporarily lowered to 10% until July 9 to allow for negotiations.

Since then, only a few tentative trade frameworks have been agreed upon, with agreements limited to the U.K. and Vietnam, as well as a truce with China. In an effort to accelerate talks, the administration has begun sending letters to various countries, informing them of their tariff rates if a deal cannot be secured.

The move signalled the administration’s willingness to move forward with significant country-specific punitive tariffs consistent with the initial announcement before the tariff delay. However, as these reciprocal tariffs exclude products subject to sectoral tariffs, they were not as meaningful as initially anticipated. As a result, while Japan and South Korea were hit explicitly with a 25% tariff, only 20% of their trade is exposed to these additional duties.

President Trump also recently announced an additional 50% sectoral tariff on copper. Though the U.S. is highly reliant on imports and the move would likely be counter to rejuvenating domestic manufacturing, the experience with Steel and Aluminium tariffs, where exclusions were not only revoked and derivative products included, but also increased to 50% from 25%, is a possible signal of the administration’s determination on sectoral tariffs.

Market reaction

Despite all the tariff upheaval of the past few months, equity markets have hit new all-time highs and credit spreads are close to historic tights. This likely reflects the widespread view that the administration has been willing to soften its stance multiple times to prevent a lasting market sell-off. Moreover, with Trump’s tariffs having a limited macro impact so far, markets may also be looking through trade policy and instead focusing on factors that can change economic fundamentals, such as corporate earnings.

The new status quo

Despite President Trump’s comments that there will be no further extension after August 1, that is likely not the end of the story. Trade deals typically take between 18 months to three years to finalise, making deadline extensions and renewed tensions still possible. Ongoing legal challenges also have the potential to limit the staying power of broad-based tariffs. Finally, the administration’s liberal use of tariffs as a negotiating tool to extract non-economic concessions means that tariff noise will likely remain a permanent feature of the economic backdrop.

Even through all the tariff noise, negotiations, legal challenges, and trade spats, we can be certain of three factors:

1. Tariffs are here to stay. The administration views tariffs as a key source of tax revenue to fund its fiscal expansion plans—tariffs are unlikely to disappear entirely.
2. Peak tariffs are behind us, particularly for China. A return to a 145% tariff on China’s imports would result in a trade embargo between the two nations, sharply raising U.S. recession odds again, making it politically unfeasible.
3. An increased focus on sectoral tariffs. As the administration prioritises reshaping global manufacturing toward the U.S. domestic industrial base, it will likely increasingly pivot to sectoral tariffs. While sectoral tariffs generally take longer to implement, they carry less legal ambiguity than other trade mechanisms, suggesting they have longer staying power.

With these three factors in mind, our baseline expectations include:

1. Global reciprocal tariffs maintained at 10% on average.
2. Country-specific universal tariffs on the following countries maintained near current levels: EU 10%, China 30%, Mexico 25%, and Canada 25%.
3. Current exemptions (i.e., United States-Mexico-Canada Agreement (USCMA) and energy) maintained
4. Sectoral tariffs broadened to include 25% duties on semiconductors and pharmaceuticals, while 50% duties on steel and aluminum are expanded to copper. The 25% duty on autos is maintained.

These baseline expectations imply that the average effective U.S. tariff rate will ultimately settle at around 17%, the highest level since the 1930s Smoot-Hawley tariffs, up from the current 14% and meaningfully higher than the 2% at the start of 2025.

Macro effects of the U.S. tariff baseline scenario

U.S. impact

The overall impact would result in a 1.7% drag on annual U.S. GDP growth over the next few years. It is important, however, to note that there is significant variability around this estimate. While we assume that substitution effects—which see some tariffed goods trade flows replaced by domestic sources—could mitigate some of the adverse effects, other factors, such as behavioral or preference changes and currency movements, could also increase or reduce the growth impact of tariffs.

This scenario also results in a one-off tariff-induced boost to inflation of 1.6%, likely bringing core inflation up to 3.5% by year-end. While unlikely to lead to a persistent inflationary impulse, the Federal Reserve is rightly concerned that the impact could further fuel inflation expectations, especially as overall price stability remains elusive.

Although the overall impact is not as severe as seemed likely a few months ago, tariffs will remain a sizable headwind to the U.S. economy over the next few years.

Global impact

The subsequent decrease in export volumes and tariff retaliation for impacted economies would also create a negative growth impact outside the U.S., albeit the range of outcomes is broad. Countries most dependent on the U.S. for trade are like to see the largest impact: punishing Mexico and Canada while being milder for China and the EU.

Additional levies on China in our baseline scenario are limited because current tariff levels already imply an almost 50% decline in imports from China as U.S. demand shifts to other lower-priced alternatives or is destroyed altogether. Meanwhile, the overall tariff impact on the EU could be quite punitive when sectoral levies are taken into account. Indeed, tariffs on pharmaceuticals, which account for nearly 30% of the EU’s exports to the U.S., would have a meaningful negative impact on growth.

However, it is also worth noting that Mexico and Canada would be relative beneficiaries in our baseline scenario, as the existing USMCA framework is likely to persist going forward, given deeply the integrated supply chains between the U.S., Mexico, and Canada.

Alternate tariff scenarios

As noted, with trade negotiations still ongoing and Trump emboldened by the success of tariffs as a negotiating tool to extract non-economic concessions, trade policy is likely to remain highly fluid from here. With many possible paths toward an endgame, we outline downside and upside scenarios as the potential range of outcomes for trade policy.

The downside scenario is likely triggered by renewed hostilities, which also lead to retaliation by trade partners, and the average effective U.S. tariff rate could increase to 24%. Yet, the administration is likely to steer clear of outright freezing international trade flows, so even in this downside scenario, it’s unlikely that tariffs surpass levels seen around Liberation Day, particularly the 145% tariff rate implemented on China in mid-April. The resulting drag on U.S. GDP would climb to over 2% while the inflation impact would also total more than 2%, pushing inflation further above the Fed’s 2% target.

In contrast, the U.S. administration’s ability to successfully extract significant concessions from trade partners, including massive purchase guarantees or investment commitments, could see a significant tariff de-escalation. In this upside scenario, average effective tariffs would fall to 8% from the current level of 14%. The resulting drag on U.S. GDP would be worth just 0.6%, with an equally moderate inflation increase.

Investment outlook

While the extension of negotiations through August 1 may suggest that more trade deals will materialise, investors should expect trade barriers to remain higher for the foreseeable future, suggesting there is likely to be some economic scarring. In the near term, risk-on sentiment may need to contend with an economic outlook of slowing growth, elevated inflation, and ongoing policy uncertainty. Indeed, even in an optimistic upside scenario where trade hostilities dissipate, the average effective tariff rate is still expected to triple compared to its level at the start of the year. Beyond the short term, it is worth remembering that market disruptions from policy uncertainty are typically short-lived if companies continue to deliver earnings. In turn, investors should expect continued gains in the S&P 500 if corporate earnings continue to grow.

With trade policy volatility likely to persist, it could create headwinds for the U.S. dollar, keeping it vulnerable to further downward adjustment. Yet it’s important to point out that a sharp downward spiral is unlikely. The dollar’s safe haven status remains secure for now, as over half of global trade is invoiced in dollars, and the depth and liquidity of U.S. capital markets remain unmatched.

For investors, diversification across geographies and sectors will be critical. A weakening dollar could further reinforce the case for continued international exposure, particularly as more active policymaking in other global economies invigorates growth momentum. As with any shock, trade policy volatility should create winners and losers amid increased sector bifurcation, with active management playing a key role in identifying opportunities.

Overall, despite the narrow range of outcomes with respect to trade policy, investors should not be complacent about risks stemming from abroad and the restructuring of global trade, both in the near term and the longer term.

By Seema Shah, Chief Global Strategist at Principal Asset Management

The post The end of the 90 day US tariff reprieve is over for now appeared first on AdviserVoice.

Seema Shah

Thirteen days ago, Israel launched a major military campaign targeting Iranian nuclear facilities, air defence, surface-to-surface missile sites, and senior military and scientific personnel. Over the weekend, the conflict escalated significantly as the United States directly intervened, striking three nuclear sites inside Iran.

The situation remains highly fluid, with growing concerns about Iranian retaliation and the broader consequences of U.S. involvement.

Market reaction

A general risk-off tone has returned to markets, although the overall equity market reaction has so far (up to June 20) been muted, with stocks focusing instead on macroeconomic data and central bank meetings. Investors have sought refuge from geopolitical uncertainty in traditional safe havens, although notably, there has been a greater rally in gold, Japanese yen, and Swiss franc than in the U.S. Treasury market and the U.S. dollar.

Recently, oil prices have recorded one of the sharpest rises in the past 30 years, jumping more than 20% in a week and surpassing $70 per barrel. Even so, as of June 20, oil remained below its 2024 average of $80 and is meaningfully below the levels reached in previous geopolitical shocks.

However, it is worth noting that if the conflict escalates further, threatening disruption to the flow of oil, there could be additional sharp and sustained upward pressure on energy prices.

The tail risk scenario

Until this weekend, while both Israel and Iran had traded retaliatory blows, they had so far avoided the most escalatory steps. Following the U.S.’s involvement, the risk of an Iranian attack on the Strait of Hormuz has significantly increased.

A disruption in the Strait of Hormuz would have a profound and significant impact on oil and gas flows, presenting a meaningful risk to both global trade and oil prices:

Gas: Roughly 20-25% of global liquefied natural gas (LNG) exports pass through the Strait of Hormuz. These volumes primarily originate from Qatar and the United Arab Emirates. Approximately 80% of this LNG is shipped to Asia, with most of the remainder bound for Europe. Notably, there are no alternative pipelines available to re-route these flows.

Oil: Around 30% of the world’s seaborne oil supply passes through the Strait. Volumes come from Saudi Arabia, Qatar, Kuwait, UAE, Iraq, and Iran, with the bulk of the oil destined for Asian markets. Due to limited pipeline capacity, re-routing would still leave the global market short of oil supply. Compounding the risk, much of the world’s space production capacity would also be inaccessible, leaving few options to offset the drop in supply.

On the other side, further retaliation from Israel/U.S. could result in an attack on Kharg Island – key to Iranian oil exports. Although Iran only produces around 3.6 million barrels of oil per day, accounting for just 3.5% of global production, it is estimated that around 90% of Iranian oil exports are sold to China, suggesting a significant risk to the Chinese economy.

In the most negative scenario – a complete disruption to Iranian oil supply and a closure of the Strait of Hormuz – estimates suggest that oil could rise to above $120 per barrel. OPEC+ does have spare capacity, and U.S. production has the flexibility to increase, so it may be able to offset some of the upside price pressures. However, the likely fallout from such a disruption would be very difficult to mitigate fully.

The geopolitical conflict playbook

By their very nature, geopolitical developments are fluid, and so it will be difficult to predict exactly how the Middle East conflict will play out over the coming days, weeks, and months. Past geopolitical shocks, however, can provide investors with insight into how markets typically respond and the duration of that response.

• Over the last 60 years, most geopolitical events have often been short-lived and have rarely had a sustained significant impact on equities. The median sell-off has been around 7%, typically taking around three weeks to reach a bottom and an additional three weeks to recover to previous levels. What’s more, after three months, the market was, on average, 4% higher. Steady positive economic growth, corporate performance, monetary policy, and valuations tend to matter much more than short-term market uncertainty, so, in the longer run, it’s the underlying economic backdrop that will dominate market trends.
• While regional conflicts do not necessarily directly affect the broader market, oil prices can serve as an important transmission mechanism to the economy, and central bank reactions to oil price moves are equally important.
• During the two Gulf wars, the Federal Reserve refrained from tightening monetary policy, and the economic backdrop remained solid. While equities initially sold off sharply, markets fully recovered – and even posted meaningful gains – within nine months. Similarly, the 2019 drone strikes on Saudi Aramco by Iran and others, which knocked out 5% of global oil production overnight, triggered only a brief spike in oil prices. These examples illustrate the difficulty of forecasting the medium-term path of energy markets, even in the face of significant geopolitical shocks.
• By contrast, when central banks have responded to rising oil prices by tightening monetary policy, the equity market sell-off has been more prolonged. During the oil embargo of 1973, for example, the Fed hiked interest rates aggressively to counter the inflationary impact. As a result, bond yields soared, and the subsequent equity market sell-off took several years to recover. Similarly, the Russia-Ukraine conflict in 2022 began against a backdrop of already sharply rising inflation concerns, with the surge in gas and oil prices reinforcing expectations for an aggressive Fed response to inflation fears.

A vulnerable moment

With oil prices still under $80 per barrel (as of June 20) and most global central banks at different stages of their rate-cutting cycles, the current situation in Iran doesn’t really compare to either the 1973 or 2022 episodes.

As it stands, the global economy can likely absorb the economic impact of this geopolitical conflict without significant fallout. In the U.S., real income growth remains solid, and consumer spending on energy as a percentage of income is at a near-record low, suggesting that consumption can handle some degree of higher oil prices. Additionally, U.S. businesses continue to enjoy elevated profit margins, providing them with some cushion against higher energy prices.

Still, the economy remains vulnerable to a significant rise in oil prices. Depressed energy costs have been a key factor in keeping inflation in check in recent months. With the Fed already expecting U.S. inflation to rise above 3%—in part due to new tariffs—any sustained increase in oil prices could further strain consumers and delay anticipated rate cuts. This would come at a time when cracks are already emerging in the labor market, and some degree of policy support is likely to be needed.

Meanwhile, global uncertainty is already elevated following the U.S. move to impose new import tariffs. A worsening conflict that drives oil prices sharply higher could further damage market sentiment, undermine capex plans, and weigh on earnings. Having already absorbed a series of shocks this year, risk assets remain highly sensitive to additional negative surprises.

Market implications and asset allocation decisions

History suggests that making dramatic portfolio changes in response to geopolitical crises is often a mistake. Market performance tends to be driven more by underlying macroeconomic conditions than by short-term shocks. While the global economy faces several headwinds, it remains resilient enough to absorb a moderate increase in oil prices.

That said, the risk of a sharp spike in oil and a broader hit to market sentiment cannot be ruled out. In this environment, it’s essential for investors to maintain well-diversified portfolios designed to navigate periods of heightened uncertainty.

Global diversification: While a severe spike in the price of oil resulting from an attack on the Strait of Hormuz would impact the global economy, some economies would be less exposed than others.

• U.S.: As a net energy exporter, the U.S. is less vulnerable to a rise in oil and gas prices – and U.S. oil production may even benefit from higher prices. However, any oil price increase would add to the tariff-driven inflation surge that is already expected, likely further delaying Fed cuts.
• Europe: By contrast, Europe is a net importer of oil and LNG. Any disruption of supply would have a more significant impact on energy prices across Europe. However, the region has gradually reduced its reliance on LNG from the Middle East, and it is, therefore, less exposed than it once was.
• Asia: Asian oil importers, such as India and Indonesia, are among the most exposed to an oil price shock, given their heavy reliance on Middle Eastern crude. China, in particular, is highly vulnerable to any disruption in Iran’s oil infrastructure, as it accounts for roughly 90% of Iranian oil exports.

Quality: The story remains the same—market conditions have grown more challenging due to U.S. policy uncertainty, shifting trade dynamics, tariff-driven inflation, and now, rising geopolitical risks. In this environment, companies with robust balance sheets, resilient business models, and pricing power are best positioned to outperform.

Energy and Defence: Energy has underperformed in recent months, but higher energy prices would drive a stronger performance. With the sector also positioned to benefit from deregulation, recent weakness may present a buying opportunity. Defence has been a strong performer so far this year, particularly in Europe, as governments prepare to increase spending on military equipment. Middle Eastern geopolitical tensions are likely to continue supporting defense stocks.

Gold: Gold has been a major beneficiary of safe-haven flows, more so, in fact, than the U.S. dollar. This serves only to reinforce the growing narrative of U.S. dollar weakness, driven not just by cyclical U.S. weakness but also by longer-term concerns about the reliability and strength.

By Seema Shah, Chief Global Strategist

The post Iran conflict sparks geopolitical shockwave as markets brace for impact appeared first on AdviserVoice.

Seema Shah

After one of the most volatile stretches in recent memory, the middle of 2025 offers an important moment to pause and take stock. Over the past few months, forecasts have been made and revised, policy announcements have been introduced and then walked back, and markets have swung between fear and optimism. Whiplash isn’t just a metaphor—it’s the lived experience of investors trying to make sense of it all.

Amid the noise, a clearer picture is starting to emerge. The U.S. economy remains resilient but is slowing, policy uncertainty continues to cast a long shadow, and markets are adjusting to a more complicated set of signals—rising fiscal stress, sticky inflation, and shifting global dynamics. With tariff and tax decisions still pending, visibility remains low beyond the next few months, but the near-term contours of the macro and market path are beginning to take shape.

1. A resilient economy, but growth headwinds are building

Trade tensions have undoubtedly taken a toll. Escalating tariff uncertainty has delayed corporate investment, frozen hiring plans, and weighed on both business and consumer sentiment. And yet, despite this, the U.S. economy has so far avoided recession, supported by the continued resilience of household and corporate balance sheets as well as the lingering momentum from a strong first quarter.

Our base case remains for the U.S. to narrowly avoid recession as the economy navigates persistent policy uncertainty. Encouragingly, this forecast was intact even before the U.S.-China trade truce was announced in early May, as we assumed that the U.S. administration would recognise the risks and back away from the economic ledge.

2. Tariff uncertainty persists—and may worsen

Tariff noise is likely to persist over the coming months. Although the Court of International Trade unanimously ruled against President Trump’s tariffs, initially imposed through the International Emergency Economic Powers Act (IEEPA), it is unlikely to be the end of the tariff story. The administration has indicated that it will appeal the decision, and if that fails, it has other avenues it can pursue to ensure that Trump’s tariff agenda takes effect. If anything, tariff uncertainty will likely continue.

Should the administration succeed in reasserting tariffs, the average rate could settle at 12.5%—substantially down from the 28% level before the announced U.S.-China trade truce, but still well above the 2% level that prevailed at the start of the year. Note, too, that the average tariff rate is still biased higher. Not only has Trump not announced additional sectoral tariffs, but his recent threat to raise European Union tariffs to 50% emphasises the risk that tariffs may settle at a higher level once the 90-day reprieve ends.

3. The Fed walks a tightrope

The Federal Reserve is navigating a narrow path. While they expect the economy to soften, persistent trade uncertainty is ripe ground for monetary policy missteps, particularly when inflation is already running above target and expected to see a tariff-induced boost in Q3, and economic data remains resilient. Many analysts have argued that the Fed should focus on the full employment side of its mandate and re-start rate cuts immediately. Yet, with both large and small businesses indicating that they plan to hold onto their workers and ride out the tariff storm, only a modest weakening in the jobs market is likely, further reducing the urgency for Fed support. We expect the Fed to wait until Q4 before it reduces policy rates.

4. Growth-oriented policy: Deregulation and fiscal expansion

Two growth-friendly policy measures may help mitigate trade-related headwinds. First, a renewed push for deregulation—particularly in the energy and financial sectors—echoes pro-growth efforts from Trump’s first term and could provide an important boost to economic growth. Second, modest fiscal expansion is on the table. While its impact may be somewhat muted, combined, these growth-friendly measures should help to offset the negative headwinds from tariffs.

5. Fiscal stimulus: Modest in impact, risky in optics

The passing of the administration’s major tax and spending legislation, which largely involves extending the 2017 Tax Cuts and Jobs Act, is predominantly a continuation of existing policy and would not provide a new boost to economic growth. Alongside some incremental modest tax cuts, which would be funded by tariff revenues and some spending pullback, not only is the direct economic boost expected to be fairly modest, but, more importantly, the fiscal package is unlikely to meaningfully improve the U.S.’s long-term fiscal trajectory. Moody’s recent downgrade of U.S. debt underscores that fiscal credibility remains under pressure and that market concerns regarding the U.S. fiscal picture are likely to persist.

6. Bond market tensions: Long yields up, short yields anchored

In recent weeks, renewed fiscal fears, alongside improved U.S. growth forecasts and sticky inflation concerns, put upward pressure on long-term U.S. Treasury bond yields. With bond vigilantes circling, markets are likely to demand spending cuts that are large enough or economic growth that is strong enough to bring the deficit under control, suggesting that long-term Treasury yields are likely to remain elevated over the near term. By contrast, the slowing economy and the prospect of Fed rate cuts later in 2025 should maintain downward pressure on short-term Treasury yields.

7. Equities recover—But risks remain

Equity markets have almost entirely recoupled their losses from earlier in the year, with the S&P 500 posting its strongest monthly gain in 18 months in May. Yet the recovery seems at odds with an economic backdrop characterised by slower growth, higher inflation, and lingering policy uncertainty. Indeed, with the effects of earlier tariff uncertainty likely to begin manifesting in economic and inflation data over the coming month, near-term volatility is expected to persist as these tensions play out.

8. Higher yields pressure equity valuations

In addition to deteriorating economic data, another key vulnerability for the equity market may be the bond market itself. Although equity returns and bond yields are typically positively correlated, if the rise in yields is due to fiscal concerns, the correlation can turn negative, weighing on equity returns as the potential for multiple expansion becomes increasingly strained. As a result, persistent debt and deficit fears that drive up bond yields may test the equity market.

9. A Dollar under pressure

One of the most notable shifts in markets in recent months has been the decline in the U.S. dollar, which has defied both interest rate differentials and the traditional rush for safe havens during times of heightened volatility. With weakness reflecting concerns over the domestic outlook and institutional credibility, a further weakening is possible. Not only is the USD still overvalued, but heightened tariff policy uncertainty, lingering fiscal woes, and growing animosity toward the U.S. are likely persistent headwinds.

10. U.S. dominance: Structurally intact

While there is cyclical risk associated with the U.S., the structural investment case—which has driven outperformance in recent years—remains compelling. The long-term drivers—technology leadership, innovation, deregulation, and productivity—are still very much in play. Moreover, in the absence of a credible reserve currency alternative, U.S. exposure will remain a foundational component of global portfolios.

Implications for investors

The first half of 2025 has tested investor conviction, challenged assumptions, and reinforced just how quickly the macro and market narrative can shift. While the outlook beyond the next few months remains clouded by unresolved policy decisions, the core dynamics—slower growth, persistent inflation, elevated fiscal risk—are now more visible.

Heading into the back half of the year, portfolios should tilt toward resilience and selectivity. As such, investors should consider:

• Short-duration, high-quality fixed income for stability and income.
• Equities with pricing power, strong margins, and clean balance sheets, especially in sectors benefiting from deregulation or insulated from trade frictions.
• Global diversification to hedge dollar weakness and access non-U.S. growth opportunities.
• Active management to identify mispriced risk and sector rotation opportunities in an increasingly idiosyncratic environment.

Even in periods of high uncertainty, there are still ways to position portfolios to take advantage of growing divergences beneath the surface—between sectors, regions, and asset classes. Cutting through the noise means staying grounded in what is known, alert to what is changing, and prepared for what is next.

By Seema Shah, Chief Global Strategist

The post Mid-year Perspectives 2025: Cutting through the noise appeared first on AdviserVoice.

Seema Shah

President Trump announced a 90-day reprieve on reciprocal tariffs, reducing them to 10% across all countries except for China, on which the U.S. raised reciprocal tariffs even further, from 104% to 125%. President Trump’s announcement emphasised that the decision to single out China was because they had retaliated against his reciprocal tariffs, whereas other countries had tried negotiating with the U.S.

Note that steel, aluminium, autos, and non-USMCA goods from Canada and Mexico are still subject to 25% tariffs. President Trump reiterated that he will still be announcing sectoral tariffs in due course.

What drove the President’s decision?

The decision to grant a temporary reprieve came after the S&P 500 had dropped 18.9% from its late February peak (almost entering bear market territory) and after the bond market started to show concerning signs of a “buyer’s strike,” driving bond yields higher across the curve.

This final point around the bond market likely struck a nerve with the Trump administration. They have repeatedly emphasised their focus on bond yields and even celebrated last week when Treasury bond yields dipped below 4%. Low financing costs appear to be a key pillar of the Trump administration’s overall agenda, so the reversal in market trends (surging Treasury yields) undoubtedly caused significant concern in the White House. Additionally, there were some unsubstantiated fears that stress was starting to build in the financial system, with a few comparisons even made to the Global Financial Crisis. These concerns prompted swift action to reduce the policy-driven risks.

Ultimately, Wednesday’s tariff pause highlights that President Trump cares deeply about the health of financial markets, and his pain threshold is most likely centered around the performance of the bond market. This knowledge should provide investors with some comfort as they try to map out a playbook for this crisis.

Market response shows the need to stay invested

Markets surged on the news, with the S&P 500 climbing almost 10% and the Nasdaq up 12% – their biggest single-day gains since 2008 and 2001, respectively. Credit spreads tightened, the VIX fell sharply from 58 to 34, and 30-year bond yields reversed their spike from earlier in the day. European and Asian markets are following the U.S. higher this morning. Still, despite the historic rally, the S&P 500 remains 4% below its level prior to the Liberation Day announcements.

For investors, the tariff pause announcement, and subsequent market reactions reiterates the importance of staying invested in these volatile times, particularly when politics lies at the heart of the market disruptions.

After the sharp market swings of the past few days and a rapid drop in valuations, risk assets were primed for a strong rebound. If investors had moved into cash to wait out the volatility, they would have missed out on the tremendous upward move. Staying invested and retaining disciplined investment behavior are essential during periods of stress.

Impact on growth outlook… seeds of doubt are germinating

Now for the bad news. There are already a few seeds of doubt creeping back into the market, and U.S. equity futures are trading lower today as investors start to digest the fact that President Trump’s decision to raise tariffs to 125% on Chinese goods broadly offsets the positive impact of lowering other countries’ reciprocal tariffs to 10%.

Recall that, ahead of last week’s announcement of a 90-day reprieve and a further increase in China’s tariff rate, the U.S.’s average effective tariff rate had increased from 2% at the end of 2024 to 28%. After the announcement, the effective average U.S. tariff rate only falls to around 23%—still the highest level in over a century. Indeed, the 125% tariff on China represents a 19% effective tariff increase by itself. The upshot of this is that the U.S. economy is still likely to be hit meaningfully by import tariffs, and tariff-driven inflationary surges are still on the cards.

It is possible that the negative impact may be dulled somewhat if China can re-route its exports via other Asian countries, which now face 10% tariffs. Certainly, the very acute asymmetry in tariffs likely does allow for workarounds and trade diversion.

In last week’s bulletin, we noted that without deregulation, tax cuts, or a walk-back from import tariffs, the U.S. economy appeared headed toward recession. While the latest announcement has somewhat reduced the odds of recession, the risk remains elevated. A more substantial decline in recession risk would likely require a meaningful walk-back of the extreme tariffs on China.

Outlook for investors… as of today

Peak tariffs and, therefore, peak pessimism, has likely been reached. Knowing President Trump is watching bond markets also implies that the tail risk of liquidity strains morphing into a financial crisis has been cut back significantly and provides a floor from which market sentiment can recover.

That said, caution remains warranted. The potential impact on the U.S. is still significant, and uncertainty is likely to remain elevated through the 90-day grace period and as the U.S./China back-and-forth persists. Some damage to confidence—especially international confidence in the U.S.—has been inflicted and may prove lasting.

In times like these, the adage of staying invested with a diversified portfolio is more important than ever. Global diversification remains essential, especially given the asymmetric implementation of tariffs across countries, while cross-asset class exposure provides valuable resilience in periods of heightened volatility. After a sharp decline, equities have the potential to recover in the months ahead, and fixed income can help cushion ongoing economic risks that are still confronting the U.S. economy.

Most importantly, investors should remember that market pullbacks are not unusual—on average, the U.S. stock market experiences an intra-year decline of 13.5%, yet most years still end with gains of around 9%. Volatility is a normal feature of investing, not a flaw—those who remain disciplined and invested through the noise are often rewarded over time.

By Seema Shah, Chief Global Strategist 

The post Market impacts of the 90-day tariff reprieve appeared first on AdviserVoice.

Trump’s opening tariffs target Mexico, Canada & China

On February 2, U.S. President Donald Trump signed executive orders imposing punitive trade tariffs on imports from Mexico, Canada, and China, citing concerns over illicit drugs and illegal immigration. He also floated a potential additional 10% tariff on imports from the European Union. The key measures of the executive actions include:

Mexico & Canada: 25% tariff on imports, except energy imports from Canada, which will face a 10% tariff.
China: 10% tariff on imports.
E-Commerce exception suspended: The “de minimis” exception, which allowed duty-free entry for packages under $800, will no longer apply for these countries. This rule was largely seen as a benefit for Chinese e-commerce retailers.
Delayed implementation: Originally set for February 4, tariffs on Mexico and Canada have been postponed by 30 days following initial agreements on drug and immigration controls. Tariffs on China remain on schedule.
Issued under the International Emergency Economic Powers Act (IEEPA) and the National Emergencies Act (NEA), which do not require investigations or reports, these actions are unprecedented and likely to face legal challenges. Notably, there are no explicit criteria for lifting the tariffs beyond cooperation with the drug and immigration measures, which adds additional uncertainty to an already volatile market.

Tariffs fuel market uncertainty

Markets initially tumbled in response to President Trump’s tariff announcement amid broad risk-off sentiment. Fears of tariff-driven stagflation sent short-term Treasury yields soaring while long-term yields fell, flattening the curve. The sharp market reaction suggests many were caught off guard. While Trump signaled tariff plans during his reelection campaign, few expected such swift action—especially with steep tariffs on both Mexico and Canada. Markets regained some ground after the 30-day delay for tariffs on both Mexico and Canada was announced. Asian equities also retraced some losses after Trump said he will hold further talks with China; however, the situation remains fluid, keeping investors on edge.

Lessons from the 2018 experience

The trade war under Trump 1.0 involved several of the U.S.’s major trading partners but was predominately focused on China, dampening both economies by 0.3%-0.7%. The dollar surged, while U.S. inflation saw only a modest 0.1% increase, allowing the Federal Reserve to begin its rate-cutting cycle in 2019 amid slowing global trade and investment.

While providing helpful context, today’s trade tariffs are much broader—covering $1.4 trillion in trade, four times the 2018 level—and much larger. Unlike in 2018, tariffs are likely to cover consumer goods and capital equipment, resulting in a potentially more significant impact on consumers and inflation. And, with inflation still a concern, policymakers and businesses are likely to be far more sensitive to price pressures this time around.

Trump 2.0 – Impact of tariffs on growth and inflation

Assuming all the announced tariffs eventually go ahead, our initial estimates (which do not take retaliation, offsetting currency impacts, or concessions into consideration) suggest a greater economic impact than in 2018:

Mexico/Canada economies: The impact of an additional 25% tariff on Mexico and Canada is likely to be sizable given how much both rely on the U.S. for trade. With the U.S. accounting for 20-30% of both economies’ total exports, rough calculations suggest that the estimated negative growth hit could range from 7% to 10% of GDP. In other words, impactful enough to throw the Mexican and Canadian economies into deep recession. Their central banks are likely to respond with additional rate cuts, putting further downward pressure on their currencies.

China economy: While the additional 10% tariff on China could lead to a direct GDP drag of about just 0.4%, the broader impact may be greater, threatening China’s global economic leadership ambitions. With an already struggling economy—still reeling from the property market downturn and weak sentiment—China remains heavily export-dependent, making it highly vulnerable to an increase in tariffs. In response, local authorities would likely ramp up stimulus measures in an attempt to offset the downside risks.

U.S. GDP growth: The broad impact of these tariffs will likely negatively impact U.S. growth and accelerate U.S. inflation. The tariff increases would push the U.S. effective tariff rate up from 3% to 11%, reducing GDP by an estimated 1.2%. While smaller in magnitude and less significant than the hit to Mexican and Canadian growth, it would represent an important growth shock. Other policy measures, such as tax cuts and deregulation, may be required to cushion downside risks.

U.S. inflation: As U.S. consumer spending on food, energy, and autos depends heavily on North American trade, these tariffs will likely have a meaningful impact on U.S. inflation. Estimates suggest that tariffs could result in a 0.5%-1.0% increase in U.S. inflation in the near term, potentially pushing headline inflation back towards 4%.

Whether the increase in inflation is sustained, however, is likely to be determined by a variety of factors, including whether wholesalers or retailers opt to absorb some of the tariffs in their margins, if U.S. consumers substitute lower-cost domestic goods, if inflation expectations remain anchored, and how much the U.S. dollar appreciates.

Fed impact: With uncertainty likely to remain elevated for investors and policymakers alike, the Fed is likely to begin a prolonged pause in policy actions until they have greater clarity about the tariffs and their impact on both growth and inflation. It is worth noting that, with disinflationary progress stalled and price pressures still above the 2% target, the Fed may be more sensitive to the inflation side of their mandate.

Navigating a volatile trade environment

Near-term tariff uncertainty may dampen business confidence and capex, pushing risk premiums higher and weighing on asset prices. However, the U.S. economy remains resilient, with strong growth, a firm labor market, and solid corporate and household balance sheets providing buffers against headwinds. While volatility is likely to persist, this backdrop suggests selective opportunities and positive market returns.

• U.S. equities: Large-caps with high international exposure, including the Magnificent 7, will face pressure from the tariffs due to China-related revenue exposure (ranging from 3-21%). Small caps have a greater domestic focus and may hold up better. Across sectors, technology and certain pockets of consumer discretionary are likely to be the most vulnerable, while defensive sectors, like utilities, healthcare and financials, should be more insulated.
  International equities: Markets have yet to fully price in trade risks, especially in Europe, where future tariffs pose a significant downside threat.
• U.S. Dollar: Continued dollar strength should be expected as tariffs weaken other economies. This may be further exacerbated by widening interest rate differentials as impacted economies loosen monetary policy to counter economic strain.
• Emerging markets (EM): Tariff risks seem to remain underpriced across EM, while a stronger dollar could challenge these economies. With ex-China EM growth healthy, the EM complex should remain relatively well supported. Differentiation will remain key as trade and foreign direct investment flows are inevitably rerouted.

President Trump’s unilateral control over trade policy ensures elevated market volatility for the foreseeable future. Furthermore, his willingness to use tariffs to attempt to achieve non-economic goals challenges the assumption that he would walk back from some of his most severe policy proposals.

Therefore, the greatest market risk likely lies in policy unpredictability—the timing, scope and duration of the Mexico, Canada, and China tariffs remain unclear—as the path forward for additional tariffs is uncertain at best. Given this environment, diversification is essential to manage portfolio risk and capture opportunities as companies, countries and markets adjust.

By Ms. Seema Shah, Chief Global Strategist

The post The opening salvo in Trump trade war two  appeared first on AdviserVoice.

Seema Shah

To no-one’s surprise, the Federal Open Market Committee (FOMC) chose to keep the benchmark policy rate at 5.25% – 5.50% yesterday. More significantly, the latest dot plot revealed the committee continues to expect 75 basis points of cuts this year. That is despite recent upside inflation surprises as well as upward revisions to both its GDP growth and inflation forecasts. This is a Fed that wants to reduce interest rates.

The Fed did not make any announcements with regards the balance sheet but noted that they will likely begin to slow quantitative tightening fairly soon.

Recent upside surprises

The past few months have been a particularly volatile period for Fed forecasts. As recently as early February, financial markets were convinced that the Fed would cut policy rates at least six times this year. Yet the hot January and February inflation and jobs reports prompted markets to significantly revise their expectations, bringing them in line with our own forecast for three cuts this year, starting in June.

In the last week, there has been growing speculation that the latest inflation prints represented a setback to the Fed’s efforts to reach the 2% inflation target and, as such, the Fed’s dot plot may see one cut removed this year.

In fact, the Fed maintained its median forecast for three cuts this year, suggesting that the Fed believes the recent inflation prints may have potentially been distorted by seasonal effects and, as a result, the broader picture of disinflation has not changed.​

Updates to the Summary of Economic Projections

The new dot plot and Summary of Economic Projections (SEP) indicated that inflation has proven to be slightly stronger than the Fed had anticipated, but economic growth and the labour market are stronger—essentially, a soft landing.

• The 2024 GDP growth forecast was revised significantly higher, from 1.4% to 2.1%. Growth for 2025 and 2026 were also both revised higher to 2%. This implies they expect growth to remain above potential (estimated at 1.8%) for the entire forecast period.
• The core PCE inflation forecast for 2024 was revised up from 2.4% to 2.6%, moving further away from the 2% target. While this was at least partially a reflection of the higher-than-expected inflation prints for January and February, the implication is that they do not need to see inflation dropping to 2.5% before they cut rates. Forecasts for 2025 and 2026 were left unchanged at 2.2% and 2.0%, respectively.
• The SEP sees unemployment rising to just 4.0% this year, and 4.1% next year.

Despite the picture of stronger growth and higher inflation, the new dot plot was only slightly adjusted:

• The median projection still sees rates falling to 4.6% by the end of this year. This equates to 75 basis points of cuts in 2024, unchanged from December.
• Of the 19 participants, 18 see three or fewer cuts this year. Only one sees four cuts. Two participants expect no cuts.
• The median dot falls further to 3.9% by end-2025, equivalent to another 75 basis points of cuts. By contrast, the December 2023 dot plot projected 100 basis points of cuts in 2025.
• The median dot then falls to 3.1% in 2026, equivalent to another 75 basis points of cuts. This implies that between 2024-2026 the committee anticipants 225 basis points of easing.
• As was much anticipated, the median longer run dot was increased slightly, from 2.5% to 2.6%—a (slightly) higher-for-longer outcome.

Looking ahead

Powell downplayed the importance of the recent inflation prints, instead referring to the expected inflation path as “bumpy.” He did, however, acknowledge that the prints have not helped their disinflation confidence and noted that they will need to gain more evidence and confidence that inflation is trending back toward target.​

Even so, the FOMC’s expectation that inflation will only fall to 2.6% this year, and that being a sufficient condition to start easing monetary policy, will raise questions about their commitment to the 2% inflation target. Furthermore, cutting rates at a time when the economy is running above trend and while unemployment is still near record lows surely raises the risk of another inflation wave.​

The overall picture, however, was of a Fed that really wants to cut rates, would need a good reason not to cut rates, and is quite confident in its expectations for a soft landing. Markets couldn’t really have hoped for a more market friendly Fed decision.

By Seema Shah – Chief Global Strategist

The post The Fed is signalling that it really wants to cut rates appeared first on AdviserVoice.

With inflation still elevated but recession risks rising, markets were divided about today’s decision. Even the Governing Council was apparently locked in heated debate and only reached their decision to hike by a majority vote, not by unanimity. Ultimately, it seems that the ECB has put more weight on sticky inflation than the weakening growth environment, likely deciding that a hike was needed before a stagflationary dynamic gathered momentum.

The future policy path is still somewhat uncertain. The statement noted that, “the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target,” suggesting that the ECB believes rates are potentially at a sufficiently restrictive level and will just need to be maintained here until inflation pressures fade. Yet, in the press conference, ECB President Christine Lagarde refused to say that policy rates have peaked and continued to note the ECB’s data-dependent approach to policy decisions. However, she commented very clearly that the Governing Council was not discussing rate cuts.

Balance sheet operations and liquidity backstops

The ECB also confirmed that balance sheet normalization (Quantitative Tightening, or QT) continues “at a measured and predictable pace.” The asset purchase programme (APP) portfolio has been declining since the end of June, and the ECB confirmed its discontinuation of reinvestments under the APP. There was no change to the expectation for the reinvestment of PEPP principal payments until at least the end of 2024.​

Latest staff projections: revisions deliver stagflation

The ECB published its updated full-year average staff projections.

GDP growth was revised downward for all periods:

• 2023: 0.7% (decline from 0.9% in June)
• 2024: 1.0% (decline from 1.5 in June)
• 2025: 1.5% (decline from 1.6% in June)

By contrast, the inflation outlook was upwardly revised slightly:

• 2023: 5.6% (increase from 5.4% in June)
• 2024: 3.2% (increase from 3.0% in June)
• 2025: 2.1% (decline from 2.2% in June)

The opposing directions of the growth and inflation forecast revisions lay bare the ECB’s dilemma. Despite economic growth weakening and recession risks rising, underlying price pressures remain high. The recent increase in energy prices further complicates the issue as they will likely weigh on growth and push up inflation.

Lingering inflation and weaker growth

The ECB will be weighing how much economic pain may be needed to achieve its price stability mandate. European inflation derives from demand and supply imbalances, but ECB policy tools can only affect demand, which has already weakened more than inflation. Following the announcement, European sovereign bond yields immediately declined, together with a weaker euro currency. The downward movement likely reflects the market’s growing belief that today’s decision was a dovish hike and that ECB policy rates have now peaked.

Outlook uncertainty​

After ten consecutive hikes and a cumulative 450 basis points of tightening, economic and inflation uncertainty is elevated for the euro region. Policymakers must navigate a complex balancing act between weaker growth and elevated inflation. Weaker growth suggests limited scope for further hikes, but the ECB will only explicitly signal a pause in its hiking cycle once disinflation developments become more visible. Ultimately, the trajectory of inflation suggests that the ECB, like its U.S. central bank brethren, will have no choice but to adopt a higher-for-longer approach to policy.

By Seema Shah, Chief Global Strategist

The post Markets see the ECB peak appeared first on AdviserVoice.

As we outline in this year’s Midyear perspective, the top of the 2023 investment theme list: The painful spike in inflation last year has meant that many global developed market central banks have been forced to aggressively tighten monetary policy. It is doubtful that any rate cuts will come this year, and the U.S. economy is still to face the lagged effects of policy rate increases to date.

For global investors, the year’s second half will likely see equities face pressure from earnings declines. At the same time, riskier fixed income assets have yet to entirely discount the impending economic slowdown. And with the slowing growth outlook likely further depressing select alternatives, such as commodities and natural resources, preparing portfolios for the future will, more than ever, require innovative solutions aligned with client investment goals.

Despite the gloom, the second half of 2023 arrives with plenty of opportunity. For starters, any equity market pullback will likely be brief due to the short and shallow nature of the expected U.S. recession, and the subsequent swift recovery will demand an agile and proactive response from investors. Non-U.S. and and small cap equities may provide opportunities, benefitting from more attractive valuations, a structurally weaker USD and, in the case of Japan, an inflation renaissance.

In this evolving environment, look to high quality fixed income investments for stability and income. And although high quality duration is likely to outperform as the economy slows, as the short and shallow nature of the recession suggests that defaults in the broad credit space should not significantly spike – spreads offer reasonable compensation for the additional risk as investors move down the quality spectrum.

Alternative investments will also play a vital role in diversifying future portfolios beyond traditional equities and fixed income, and listed infrastructure investments can be sought to mitigate ongoing inflation risks.

Read the recession report.

By Seema Shah, Chief Global Strategist

The post A short and shallow recession appeared first on AdviserVoice.