House View Q2 2025

Equities

We are cautious of equities given the worsening outlook for global trade. The environment for equities is much more uncertain than in the past two years or more. There is a risk of further declines should the trade war intensify.

That said, while a weaker economic backdrop could eventually lead to a significant weakening of earnings growth, this has yet to happen. Should trade tensions begin to abate, earnings would be likely to provide support for equities.

While we proceed with more caution, we are conscious of the potential for both US tax cuts later in the year and further rate cuts from the Fed providing support to risk assets.

Government bonds

Major government bond markets have witnessed wildly different fortunes so far this year with US government debt rallying amid growing concern about the US economy and European bonds falling as investors anticipated the prospect of a sharp increase in supply.

We are overweight the US bond market. While US economic growth has been robust, recent soft economic data releases suggest the risk of a recession is rising. The imposition of tariffs raises this risk further.

As for Europe, we have seen a seismic shift in German attitudes to deficits. Together with decisions taken at the EU level, this suggests markets will have to absorb substantially increased supply over the next few years. All else equal, this is likely to translate into higher long-term bond yields.

As for the UK, we believe short-dated bonds stand to benefit from faster cuts in short-term interest rates than is currently priced into the market.

Credit

We are cautious on the prospects for corporate bonds given that the extra yield offered relative to safer government debt remains too low to compensate for the additional risk, by historical standards. We expect European investment-grade debt to outperform, while we have a preference for more defensive issues and sectors.

Our caution is partly explained by a fear that the worsening trade environment could result in a more severe economic contraction. There is a danger trade uncertainty lasts for an extended period and that US tariffs lead to tit-for-tat responses.

1. Trump 2.0: Domestic and trade disorder and disruption

The trade war has begun. While it will take time for the full impact on economies and corporate earnings to be felt, a slowdown is virtually guaranteed. The second-order impacts will include damaged consumer confidence and suspended business investment, but the severity and duration are uncertain. Countries impacted will likely retaliate.

A move toward protectionism in the US will likely alienate allies and cause damage and ‘deadweight loss’ to the US economy, while raising a modest amount of tax. This imposition of broad-based tariffs can be thought of as a negative supply shock that, when permanently imposed, raises prices and decreases an economy’s overall potential growth.

2. Solidarity and self-reliance replace the rules-based order

The reorientation of the US under its new administration, from the willingness to negotiate with the likes of Russia, to outright criticism of Europe, has prompted a re-think of many of its allies.

Many countries will look to become more self-sufficient militarily – something that the US arguably sees as a good thing. Private sector companies may also seek to terminate contracts with US firms. The biggest shift will be in Europe, where a concerted effort is being made to decrease dependence on the US, to cease internal division and infighting, and to ramp up spending to levels once perceived as fantastical.

3. Tech revolution’s testing times

Recent years have witnessed a boom in spending on artificial intelligence, reminiscent of the dot-com mania of the 1990s. For all the hype, we are still in the early days of this ‘gold rush’ and are seeing the first of what will doubtless be many corrections.

The inputs needed for successful models are expensive, and require huge numbers of chips and data and massive amounts of energy.

The launch of a new artificial intelligence app by DeepSeek, a Chinese AI start-up, in early 2025 was a shock for two reasons: first, American dominance was suddenly challenged, and second, the purported efficiency gain made assumptions on semiconductor demand (and profits) less certain.

But rapid technological advancement is by its very nature disruptive. Estimates of when revenues or profits will justify the hundreds of billions of investment needed vary widely. Competition will be fierce and we should expect winners and losers. Optimistic projections suggest AI-related revenues are set to surge within a couple of years. The outlook appears bright, albeit uncertain.

4. Monetary divergence driven by economic variance

This theme has evolved over the past few months, as central banks that have eased monetary policy from restrictive levels turn more cautious, by-and-large ditching forward guidance in the face of uncertainty.

Core and other underlying measures of inflation have rebounded and the long-term impact of tariffs is hard to gauge. While they will tend to push up prices in the near term, their longer-term impact is less clear given the danger posed to both economic activity and individual countries’ exchange rates. Against this uncertain backdrop we see a chance for investors to unearth profitable opportunities in fixed income and currencies via relative-value trades.