The consensus view in financial markets is that tariffs are on a deescalating path, but uncertainty remains high and there is a risk of complacency. Economic fundamentals are reasonable, and both companies and consumers have adjusted well to the ‘new normal’ interest rate environment.
Earnings growth appears to be robust and the path for interest rates in most economies is lower – albeit not much lower. In the short term there is some ‘fog’ in the data as companies increased activity in the first quarter to ‘front run’ the implementation of tariffs. The second quarter saw these built-up inventories being drawn down and as we move into the third quarter, there is some ambiguity around underlying demand. Likewise, the economic impact of tariffs tends to come with a significant lag, meaning it will take some time for the data to ‘settle down’ and to
gauge their full impact.
At a glance – equities and fixed income
Equities
We continue to be ‘mildly positive’ on equities. We are, however, mindful that a lot of good news is priced in and there is a risk of complacency around tariffs. There remains scope for the ultimate level of tariffs to be higher than the consensus view of around a 10% baseline. But economic fundamentals remain reasonable and earnings growth expectations are holding up well. Overall, we do see some risks on the horizon but provided tariff issues do not escalate, then the recent market momentum could have further to go.
Fixed income
We have maintained our ‘neutral’, view on bonds having recently moved higher from a slight underweight. We see a more stable environment in government bonds but will watch the US budget process with some caution. We have taken some profits in high yield credit having seen a very strong rebound from the spike in yields witnessed in the wider market
selloff around ‘Liberation Day’ in April.
Recent asset class changes and views
European equities
We have taken European equities down to ‘neutral’ from ‘mildly favour’. The macroeconomic environment points to solid but not stellar growth, and we do expect further stimulus, not least in Germany as the fiscal stimulus begins later in the year. In the short term, however, although European equities have seen a very strong start to 2025, we are yet to see any pickup in company earnings. We are also mindful of tariff risks in the near team, with some uncertainty around agreeing a framework for lower tariffs with the US. Given our higher conviction in both emerging market and US equities, we have downgraded our views on Europe.
Asset Allocation Matrix
Asset Allocation | Equity Region | Fixed Income (Spreads) | |
|---|---|---|---|
Strongly Positive | |||
Positive | |||
Mildly Positive | Equities Property | US EM | Corporate IG Corporate HY EM – Local |
Neutral | Commodities Bonds | Pacific ex-Japan UK Europe ex-UK | EM – HC G4 Govt |
Mildly Dislike | Cash | Japan | |
Dislike | |||
Strongly Dislike |
