Multi Asset Strategy Quarterly – June 2025

While the tariff picture continues to evolve, with an increasing number of trade deals under negotiation, it continues to create uncertainty around the inflation outlook and raises the risk of a stagflationary scenario taking hold in the US. Despite these headwinds, US economic data remains buoyant and inflation pressure benign, with strong disinflationary forces from housing continuing to support progress. The latest tax bill, deregulation, and a return to easing by the Federal Reserve (Fed) are likely to provide further support for economic growth as we move through the year and into 2026.

Recession risks remain elevated, however, with the full impact of the Trump administration’s policies, including tariffs, immigration and the Department of Government Efficiency (DOGE), a federal initiative aimed at reducing spending, still unclear, and the labour market in balance. As a result of these dynamics, we expect some ongoing volatility in the price of US risk assets in the near term, with upside risks as liquidity conditions are eased.

Supportive policy conducive to European growth

In Europe, monetary policy has been eased, with policy rates now at neutral levels. This is supporting an emerging economic recovery and a new credit cycle. The headwinds from the recent tariff announcements are expected to impact growth in the coming quarters, albeit less so than previously feared. The latest budget proposals in Germany and across Europe to increase defence spending are expected to provide ongoing support to economic growth. A dovish outlook from the European Central Bank (ECB) in the coming quarters increases the prospects for a reflationary environment in the region later this year, creating the potential for a continued supportive environment for European currencies and risk assets, outside of a renewed tariff escalation scenario.

Tariff risks drive more forceful stimulus in China

In China, easing measures are becoming increasingly robust, signalling a clear shift toward domestic consumption as the primary engine of growth. Chinese authorities have released a “special action plan” outlining a broad set of measures to support this shift — moving away from reliance on high value add industry and exports, and toward household demand, in response to rising trade conflict. We expect policymakers to do what it takes to ensure a sustained recovery in consumption, although the recent tariff announcements represent a clear headwind and imply that more forceful stimulus will be required to meet the country’s growth target.

In the near term, growth metrics remain mixed, and the recovery is likely to be uneven. Inflation remains weak, though base effects should begin to provide more support on a forward-looking basis. We continue to believe that the Chinese economy will experience a more benign outcome than the bearish consensus suggests.

Navigating divergence and volatility

As a result of our central investment roadmap, as discussed above, we continue to believe that risk assets will remain supported by easing fiscal and monetary conditions, albeit with volatility given elevated risks to US growth. The ongoing divergence between the US and the rest of the world, particularly China and Europe, where policy easing is ongoing, creates opportunities in risk assets outside of the US. In fixed income, a healthy exposure to defensive government bonds remains, given potential downside risks and a lack of value in credit markets. This provides us with dry powder to take advantage of any episodes of volatility in financial markets. In currency, we continue to monitor the US dollar for opportunities to add back to short positions, given the potential economic divergence between the US and the rest of the world.