Summary
In light of the recent tariff announcements, we foresee a significant slowdown in US growth, while recession risk has risen meaningfully. We have turned more cautious on US equities and believe that over the short term, non-US regions, especially Europe and emerging markets can continue to outperform the US market. We are more constructive on government bonds (i.e., duration), especially in US Treasuries, as a possible safeguard against a recession, particularly considering that while tariffs may have short-term inflationary effects, they are likely to impede long-term global growth.
This is an extract of our Q2 2025 Market Outlook. Click here to download the full report which includes a special feature “Trump’s tariff tango: Is there an end-game?”.
Macro: Persistent high tariff uncertainty implies rising downside risks to global growth outlook
Our analysis suggests that the Trump Administration's policies, including, but not limited to reduced immigration, cuts in Federal spending and employment, and an approximate 20% rise in the US' effective tariff rate, are projected to lower US growth to below 1% this year.
In Asia, India stands out as being-well positioned to weather the tariff shock in 2025. The outlook for China is admittedly tricky for investors because of the large headwind to growth arising from tariffs. Meanwhile, although tariffs could hurt Japan’s growth potential this year, rising wage growth could boost consumption and offset some of the adverse impact from tariffs.
Trump's tariffs effectively act as a supply shock on the US economy, potentially leading to a substantial increase in US inflation over the near-term. We estimate that this could drive the headline US CPI inflation to around 4.5% year-on-year or even higher by the fourth quarter of this year.
For countries in Asia (excluding China), the US tariffs are akin to a negative demand shock that is poised to dampen inflation in the region by impeding growth. The downward pressure on inflation is further exacerbated by reduced prices of fuel and hard commodities. This should in turn provide Asia with more scope to ease monetary policy.
Low Asian inflation leaves room for rate cuts and lower yields
Asset Allocation: Adjusting allocations towards safety amid market uncertainties
Given rising downside risks to global growth, especially on the back of recent US tariff announcements, we have downgraded US equities given their near-term risks. Europe and emerging markets may continue to outperform the US, given better-than-expected economic data and more attractive relative valuations.
We favour government bonds and cash, as a safeguard against recession, and look to increase duration exposure if economic data clearly indicates a downturn. Corporate bonds will underperform if the economic outlook worsens materially, but US investment grade credits are expected to outperform their US high yield counterpart.
Over the near-term, we prefer Emerging Market USD bonds over US credits given their attractive valuations and the potential benefits from US dollar depreciation. Additionally, Asian USD bonds may be supported by the region’s more stable fundamentals and net negative supply in 2025.
Over the medium term, predicting market outcomes in an increasingly volatile global landscape is becoming more challenging (if not impossible), unless significant clarity emerges. As such, we maintain a defensive stance towards risk assets, while being more constructive on government bonds as a hedge against higher odds of recessionary economic conditions.
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