Invesco releases 2025 Midyear Investment Outlook “The Global Reset”

• Continued uncertainty: Precise estimates of where tariff rates will settle, timing of interest rate changes, and detailed inflation and growth forecasts remain uncertain in the near term.
• Federal Reserve: US rates likely to remain on hold for longer; potential for aggressive cutting if economic activity slows down significantly.
• Non-US assets: Base case suggests that non-US assets are increasingly attractive, including Europe and Asian equities, local currency emerging market bonds and private credit.

HONG KONG, June 16, 2025 – Invesco released its 2025 Mid-Year Investment Outlook with insights on the near-term expectation for global markets through the remainder of the year.

The first half of 2025 brought unprecedented challenges, led by a broad reordering of trade relations and political alliances around the globe. Uncertainty across global markets remains a constant, and plenty of unknowns remain. The Outlook avoids precise estimates of where tariff rates will settle, the exact timing of interest rate changes, and detailed inflation and growth forecasts. Instead, the Outlook focuses on the path beyond tariff volatility and how central banks are viewing monetary policy as we enter the second half of 2025.

“The macroeconomic and geopolitical environment in the first half of the year has been challenging to navigate, but we are gaining increased clarity around the trajectory of several key global trends and macroeconomic forces,” said David Chao, Global Market Strategist, Asia Pacific at Invesco. “A slowing US economy may affect global growth, but a constructive resolution of trade tensions and the potential benefits of regulatory easing could continue to support market resilience.”

“In Asia, growth is also expected to be below trend, though many central banks in the region have already started to ease monetary policies, which should provide a floor to growth and markets,” Chao added. “In China, further supportive measures to boost consumption spending and stabilize the property market are likely to counter tariff headwinds.”

Base case: Non-US assets are increasingly attractive

In the Outlook’s Base Case, US domestic policy volatility and uncertainty are likely to persist for the remainder of 2025. While US tariffs remain at multi-decade highs, they are well below the levels announced on “Liberation Day,” and US-China trading relations are expected to gradually improve. These combined effects are likely to cause a mild slowdown, yet the extension of tax cuts and deregulation provide potential tailwinds for the trajectory of the US economy.

The inconsistencies between the hard data, which points to keeping rates on hold, and the soft data, signalling an impending slowdown justifying rate cuts, puts the Fed in a challenging position over the coming months. The Outlook suggests that US rates will stay on hold for a while longer but then be cut aggressively in the event of significant slowdown in activity.

Meanwhile, monetary policy paths are diverging globally, with central banks outside the US finding greater flexibility to ease as US tariffs and a weaker dollar contribute to disinflationary pressures abroad. This has already prompted more aggressive rate cuts than initially expected at the European Central Bank, as well as the suspension of Germany’s constitutionally limited debt ceiling, unlocking significant fiscal space and driving increased infrastructure and defense investment. These developments provide a meaningful tailwind for European growth over the coming decade.

In China, policy has turned more stimulative with an expanded 2025 fiscal budget and easing monetary measures. This has led to improved growth, evident in indicators such as auto sales, mortgage lending and retail sales. In an uncertain global macro backdrop, policymakers are likely to further support domestic household demand and private enterprise in the coming months to achieve the year’s growth target.

The Bank of Japan remains an outlier among major central banks, maintaining a tightening bias. While further rate hikes may be delayed until late 2025 or early 2026, additional tightening over time is expected. This divergence in policy is likely to provide ongoing support for the Japanese yen.

“The current market environment is an opportunity for investors to diversify their portfolios across regions and asset classes, as well as to reduce concentrations. As an exceptional run for US stocks may be coming to an end, major developed and emerging markets including Europe, Japan and China see an improving macro picture,” Chao added. “Chinese equities in particular should benefit from a ramp-up in government support, as valuations are still at reasonable levels and investors focus on major technology developments in key fields such as artificial intelligence, electric vehicles and robotics.”

Investment implications

While markets have recovered following the “Liberation Day” announcement of reciprocal tariffs and subsequent pauses, the Outlook favors broad diversification across geographies and asset classes given continued uncertainty and the potential for further surprises.

Within equities, the Outlook favours low volatility, quality, and high dividend factors within the US while limiting exposure to mega-cap names. Non-US equities are anticipated to outperform through the remainder of the year, led by European and Asian equities. Supportive policy in China should drive economic growth and benefit investors overweighting Chinese equities.

In fixed income, global ex-US bonds are preferred, as are local currency emerging market bonds. A slight underweight across most credit sectors and a cautious approach to portfolio risk-taking is favored.

Elevated downside growth risks, high equity valuations, and benign capital markets activity support a neutral stance on risk for alternative assets. The Outlook generally leans defensive in this area, favoring private credit and hedged strategies over private equity.

Among major currencies, a widespread reallocation away from US assets could cause a weakening of the US dollar, which favours major developed currencies such as the Euro and the Pound.

Alternative scenarios

Given the uncertainty surrounding the Base Case, the Outlook incorporates a range of alternative outcomes.

In a downside scenario, there is risk that US policy triggers reciprocal tariffs from other nations and limited deals are negotiated. This could result in geopolitical tensions escalating further with imports to the US falling significantly. In this case, a US recession is likely, and global growth slows down significantly as tariffs push up prices. Favored assets in this scenario include non-US low volatility and defensive equities, non-US sovereign debt, gold, and ‘safe haven’ currencies such as the Japanese yen and Swiss franc.

Alternatively, an upside scenario could occur where the US engages in a policy pivot, tempering tariff and immigration policy while focusing more on pro-growth policies. This could result in partial normalization of trade policy and an improved global growth outlook. In this scenario, a more ‘risk-on’ positioning is preferred, favoring small- and mid-cap value equities, US bonds, private and real estate equity, industrial commodities, the US dollar, and ‘commodity currencies’ like the Canadian and Australian dollar.