2025 midyear investment outlook: The global reset

The global economic and political landscape is shifting rapidly, marked by a broad reordering of trade relations and political alliances around the globe. In response, uncertainty measures across global markets soared in the first half of 2025.

We make no apologies for acknowledging that there are plenty of things we do not know today. We remain wary about precise estimates of where tariff rates will settle, the exact timing of interest rate changes and detailed inflation and growth forecasts. These estimates, among others, are heavily dependent on a more consistent sense of US policy direction.

That said, we have greater confidence in the direction of travel for some key trends, macro factors, and, ultimately, markets. We expect tariffs to be higher than in previous decades and US immigration to be lower. We expect fiscal spending on defense and infrastructure to be greater in Europe. The result is likely to be slower growth and higher inflation in the US in 2025 than was expected at the start of the year. Similarly, growth may slow outside the US but to a lesser degree. A better-than-feared resolution of tariff disputes and the positive impact of anticipated deregulation may continue to allow US markets to rally.

Looking beyond the tariff headlines

While US politics dominated the news flow in the first half of 2025, it is important to note that there have been developments elsewhere in the world that would have been the “story of the year” in more normal times.

In March, German Chancellor Friedrich Merz pledged to do “whatever it takes” to ensure the defense of Europe, releasing Germany’s debt brake and freeing the country to engage in greater infrastructure and defense spending. This bold move should provide a positive tailwind for European growth over the next decade.

China, too, is engaging in greater fiscal spending, and there are signs of improvement in the property and consumer sectors.

These green shoots are a further sign that while US tariffs will likely remain a drag on global growth, other factors are becoming more supportive of better growth outside of the US.

Watching the central banks

The US Federal Reserve (Fed) is in a tough bind. While most of the usual hard data point to keeping rates on hold, soft data point to an impending slowdown that could justify rate cuts. It is likely that US rates will stay on hold for a while longer but then be cut aggressively in the event of a significant slowdown in activity.

Other central banks have an easier task since US tariffs and a weaker dollar will likely add to disinflationary pressure in regions outside of the US and spur quicker and more cuts than were priced at the start of the year. Cuts from the European Central Bank are already helping European consumers who now have greater confidence to save less and spend more.

Of course, the Bank of Japan is the one major central bank that appears to be still on a tightening path. Further interest rate hikes may be delayed until the end of 2025 or early 2026. But we think more will come, just as other central banks ease. We suspect this will continue to support the Japanese yen.

Our base case: Non-US assets increasingly attractive

So, while policy and economic uncertainty are high and there is much we cannot say for certain, we are confident in our base case that non-US assets are increasingly attractive and poised for continued outperformance. We view this as an opportunity for investors to diversify their portfolios across regions and asset classes, as well as to reduce concentrations. This may help in weathering volatility while also allowing investors to benefit from potential upside surprises.

Scenarios: How does the trade war evolve from here?

Base case: Uncertainty continues 

• US domestic policy volatility and uncertainty are likely to persist for the remainder of 2025.
• US tariffs remain at multi-decade highs but well below levels initially announced on “Liberation Day,” and US-China trading relations gradually improve.
• These combined effects likely cause a mild slowdown in the US economy, although the extension of tax cuts and deregulation could provide a tailwind. 
• Disinflationary pressures in Europe and China should allow governments and central banks to stimulate their domestic economies.

Favored assets

• Equities: European equities, UK equities, Asian equities
• Fixed income: Global ex-US bonds (corporate and sovereign), Local currency emerging market bonds
• Alternatives: Private credit (including real estate), hedged strategies, industrial metals
• Currencies: Euro, British pound

Downside scenario: Geopolitical breakdown

• US trade policy triggers reciprocal tariffs from other nations, and limited deals are negotiated.
• Geopolitical tensions escalate further with imports to the US falling significantly. This may entail a further breakdown of the international order and/or a significant rupture of relations between the US and China.
• The US enters a recession, and global growth experiences a significant slowdown, while tariffs elsewhere push up prices outside of the US.

Favored assets

• Equities: Non-US low volatility and defensives, especially utilities and telecoms
• Fixed income: Sovereign debt, especially non-US
• Alternatives: Potentially attractive entry point for distressed debt and special situations. Hedged strategies, gold and precious metals
• Currencies: Japanese yen, Swiss franc

Upside scenario: Policy and trade war reprieve 

• The US administration engages in a policy pivot, tempering tariff and immigration policy while focusing on more pro-growth policies. (potentially due to Congress reining in executive trade authority). 
• A partial normalization of trade policy results in an incomplete return to the pre-2025 state. 
• Growth outlook improves materially outside of the US and offsets a mild US slowdown. 
• US-China relations improve.

Favored assets

• Equities: Value, small and mid cap
• Fixed income: US investment grade, US high yield
• Alternatives: Private equity and real estate equity, collateralized loan obligation equity, industrial commodities
• Currencies: US dollar, commodity currencies (Australian dollar, Canadian dollar)