2025 Mid

Ride the policy noise and shifts

The rewiring of the global economy and financial markets requires caution from forecasters, policymakers and investors. Indeed, the US approach to trade and international relations signals structural changes that will persist beyond the current administration.

Unpredictable policymaking sets an unfavourable backdrop for the economy and markets, but we also see opportunities linked to different asset prices. Despite high uncertainty and a weak growth outlook, major economies and business have proven resilient so far. The global picture remains positive for credit markets and we do not foresee a corporate profit recession.

Central Scenario: Weak growth with inflationary pressure¹

Global growth forecasts have taken a hit since the beginning of 2025 and the uncertainty about US trade tariffs will likely persist. We think tariffs will hurt growth more than boost inflation and imply higher real interest rates. Our base-case scenario is that policy uncertainty will subside over time, allowing for a more orderly relocation of supply chains with the average US tariff rate 15 percentage points higher than before the current administration took office. Global growth decelerates without major setbacks.

Investment implications: opportunities in global rewiring

We keep the view that a late-cycle is the most likely scenario, indicating a mildly pro-risk stance. However, asset allocation should also factor in the increased likelihood of the quite polarized alternative scenarios that higher geopolitical and inflation risks may trigger, as well as shifting correlations between the US dollar (USD), equities and bonds.

A key conviction is our expectation of a further steepening of benchmark yield curves, driven by higher fiscal risk, abundant bond issuance and rate volatility. In addition, we expect earnings growth to decelerate to 6%, but we do not anticipate an earnings recession.

Our dynamic asset allocation is designed to seize opportunities emerging from market turbulences and to withstand high downside risks on multiple fronts. It involves a well-diversified equity approach, tactical management of fixed income duration and curve positioning, diversification in resilient domestic stories across geographies, and enhanced hedges. In the FX space, the Japanese Yen and the Euro screen the best, the Swiss Franc is already rich, while Scandinavian currencies and the Australian Dollar look relatively more attractive.