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.

Defensive bonds

Ongoing disinflationary trends across the US and Europe are enabling central banks to gradually ease policy from restrictive levels toward a more neutral stance. The pace of these cutting cycles and eventual terminal rates will hinge on progress in inflation and growth data. While escalating tariff risks add to downside pressures on growth, they are also contributing to renewed inflationary impulses in the US.

Within the portfolio, we maintain a preference for overweight duration, focusing on regions such as the UK where interest rates have a higher impact on economic activity. Our European curve steepener positions should benefit from continued dovish central bank policies anchoring short-term yields, while fiscal expansion pushes longer-term yields higher.

Positive: Australia, UK, NZ, EU & Swedish curve steepeners

Growth bonds & credit spreads

Developed market credit spreads have retightened towards all-time highs/multiyear tights amidst a supportive macroeconomic and tariff policy backdrop. Given the limited upside, we don’t believe these valuation levels compensate investors for taking credit risks here particularly in the US where recession risks remain elevated.

Overall, we are neutral on emerging market fixed income given the uncertainty in the global macroeconomic outlook. While some regions have successfully managed inflation through timely and effective policy measures, current risk premia do not fully reflect ongoing tariff risks and potential downside risks to global growth. However, the weakening US dollar and the possibility of renewed easing by the Federal Reserve provide support for hard currency spreads.

FX

While uncertainty remains elevated, the outlook for the US dollar appears to be turning more negative. US growth momentum is showing signs of fading as the post-election boost weakens, and recent policy shifts on immigration and fiscal spending could further dampen activity, particularly given the economy’s past reliance on public sector support. In contrast, there are early signs of a recovery in European growth, aided by substantial policy easing to date. This raises the potential for increasing economic divergence between the US and the rest of the world. Against this backdrop, we maintain a bias to sell USD into strength, particularly against European currencies.

Positive: Euro, Brazilian real, Chilean peso, Japanese yen, Korean won
Negative: US dollar, British pound, Thai baht

Equity

Within equity allocations, we remain cautious on the outlook for the US due to elevated recession risks linked to tariffs and a softening labour market. That said, upside risks to US risk assets could emerge from renewed liquidity expansion as the Federal Reserve resumes easing and recently announced tax cuts take effect.

In Europe, risk assets appear well positioned to benefit from a cyclical recovery, supported by rising fiscal spending and reduced sensitivity to tariff-related pressures. In emerging markets, Chinese policymakers are actively easing policy to stimulate growth and stabilise the economic outlook. We expect this backdrop to support equity markets with close links to China, particularly given the region’s attractive valuations.

Positive: China A-shares, Eurostoxx 50

Commodities

We continue to find attractive opportunities in natural resources, underpinned by structural demand tailwinds (e.g. electrification), tight supply, and appealing valuations. Macro trends such as a weaker US dollar and rising fiscal deficits further support the sector, reinforcing its role as an inflation hedge. While geopolitical tensions in the form of tariffs and the Middle East conflict have dominated headlines, they have not derailed the long-term investment case.

In energy, near term oversupply concerns persist however we can see potential for a more positive oil outlook as we move into 2026 with US shale production plateauing and OPEC spare capacity returning to normal levels. We have also turned more positive on copper amid strong demand from China and Europe, tariff-related stockpiling in the US and unplanned supply disruptions. The market looks fundamentally tight and any price weakness may be short-lived.

Gold remains well-supported above US$3000/oz, buoyed by safe-haven demand, central bank interest and a weakening dollar. Platinum has also rallied on supply deficits, regulatory shifts, and rising jewelry demand. In agriculture, mixed fundamentals persist — rain oversupply tempers optimism, but input markets like fertiliser and protein remain firm, justifying selective overweight positions.