2025 midyear outlook: Takeaways from our ‘global reset’ webinar

Yes, we expect US equities to underperform over a multi-year period. Further, we expect the USD to depreciate against a broad basket of currencies over the coming years.

1. US equities trade on elevated multiples, and much of the world is over-indexed to US assets. Historically, this setup has portended poor returns over the medium term.
2. Compared to the US, many other markets, notably Europe, trade on lower multiples.
3. Tariffs will hurt the US consumer to a much greater degree than they will hurt global exporters.
4. Fiscal policy is becoming more expansionary outside of the US, and less so within the US.
5. Trump’s policies are making the business environment more uncertain in the US.
6. Trump’s policies threaten to increase the cost of foreigners holding US assets – Section 899 in the One Big Beautiful Bill Act (OBBB), for example. Foreign investors are reconsidering the US as a default investment choice.
7. The US consumer is resilient but can’t accelerate much more; the European consumer has greater scope to spend more as rates come lower.

Investors have a range of options open to them:

1. Reduce direct US equity exposure as their mandate allows.
2. Consider allocating to equal weighted ETFs or funds rather than cap weighting in the US. This reduces exposure to the most highly valued parts of the US market.
3. Consider allocating to US companies/sectors that have greater non-US revenue exposure. For example, you may wish to reduce exposure to domestic US consumer areas. These firms may also benefit from an earnings translation effect if the USD weakens. U.S. banks may benefit from a steeper yield curve and deregulation.
4. The USD exposure can be reduced via:
   • Currency-hedged ETFs or funds
   • Currency forwards, futures, or options can be used to offset fully or partially the USD exposure.
   • Currency overlay managers can implement more specific FX strategies if there are more specific currency views.

Moving away from US assets is difficult due to their market size and liquidity, and therefore, FX hedging remains a practical near-term tool to manage USD risks. For many, this is a new challenge, as for much of the last decade and a half, the USD has been a diversifier and not a risk for portfolios held outside of the US.

The US health care sector outlook is heavily influenced by US policy and legislation. We are cautious on the sector mainly due to its valuations looking rich on absolute measures and at best “fair value” based on cyclically adjusted ratios.

Both the macro outlook and the regulatory outlook appear unfavourable for the sector, especially as long as the macro picture depends on US policy (mostly tariffs). Even if tariffs end up lower than announced, as seems likely, they will still be higher than before. That still implies a slowdown for the US economy, which could also limit global growth.

But tariffs are inflationary in the short term, which puts the Fed in a difficult position. We think the focus will initially be on limiting inflation, so rates and government bond yields are likely to stay high.

We consider healthcare a growth sector, so a long-duration asset whose valuations depend heavily on the discount rate used on future earnings (10-year Treasury yields are a good proxy). Therefore, high or rising rates could imply underperformance.

At the same time, tariffs could push the price of medicines higher if providers can pass these costs onto customers, which may reduce demand for certain types of treatments. They may not be able to do that, however, because the White House Administration has announced a wish to reduce the price of drugs.

This would negatively impact margins and may even reduce the development of new drugs. Research and development may be under pressure anyway if the US government does not pull back from its current policy of reducing the state funding of universities.

We would usually classify the sector as “defensive”, but regulatory uncertainty could drive underperformance even in a market pull-back, when the sector usually tends to outperform.

Yes, it is a concern for investors, particularly given that rate differentials are tighter now. Hence, using JPY as a funding currency is more expensive and therefore the barrier to unwinding a short is lower.

Also, while a lot is in the price, investor sentiment towards the USD is poorer now compared to last year. A strong downtrend amid concerns around further fiscal and political risks can exacerbate an unwinding of long USD/JPY carry trades.

If we’re comparing the risks now to the unwind from July-August last year, then there are a couple of differences worth noting. Firstly, on positioning, heading into the surprise Bank of Japan hike last August, the market had been short the JPY in the build-up in July, and there was a big unwind of the JPY carry trade to take the market long. However, on some metrics, the extent to which the market got itself long JPY were less than we are today.

Secondly, on levels, while the fundamentals have changed slightly since last year, technically, we were vulnerable in 2024 and were at the highest USD/JPY levels since 1986. Whereas now we’re about 12% off those highs in a range we’ve spent much of the last 4 years.

There are two parts to fiscal stimulus - defence spending and Germany's infrastructure plan. Both are relevant.

Banks are the conduit for getting money into the economy, and account for two-thirds of the transfer mechanism in Europe. Therefore, banks will benefit from stronger loan growth in a recovery, as they're key in supporting investment. It's a nice potential tailwind for the sector.

One shouldn’t just think about this one element in isolation, however, as other drivers are relevant. We've already had the full benefit of the rate increases, which peaked in September 2023 at 4.5%, but now sit at the critical 2%. 

Short rates at 2% with a term premium are a good backdrop for banks, but we need to be mindful if rates fall further from here. At the same time, valuations have recovered a long way from the levels in 2020, before inflation returned, with the sector trading at 1.1x price to book (P/B) versus 0.4x back then. Therefore, today, we’re still overweight but less so than before 2020.

The options for UK retail investors to access private markets broadly, inclusive of private credit, have been relatively limited. 

Our view is that improving access to private markets for retail investors, being mindful of appropriate investor understanding of the investments, liquidity parameters, and risks, could be extremely beneficial to portfolios. 

The recent trends around Long Term Asset Funds (LTAF) and other vehicles we believe could improve these access points over time, and Invesco is actively engaging with leading LTAF platforms in the space to help provide compelling options.

Corporate loans to private equity-owned companies can be executed in a variety of different lending instruments, but are often done via senior secured floating-rate loans. 

While these loans would typically be considered sub-investment grade (even where they are not formally rated), significant risk mitigations exist for loan investors.  These loans are typically senior secured, which means they sit at the top of the capital structure and therefore enjoy priority claim in the event of a default/restructuring. 

Additionally, corporate loans typically have significant equity (e.g. 40- 50% +) beneath them in addition to other protections, which further help mitigate risk in the positions.  

Comparing these loans to the risk of sovereign debt will be highly dependent on the risk of the sovereign.  For investment-grade sovereigns, loans to private equity firms would typically be considered to carry a higher default risk. 

That said, please note that corporate loans are typically floating-rate, and therefore, in times of significant interest rate uncertainty, can certainly result in a more resilient experience as rate expectations more significantly impact longer duration investments.