Key points
- Trade disputes and tariffs may lead to a rise in inflationary pressures in the US, increased economic headwinds and heightened market volatility.
- The US faces significant fiscal challenges, including high debt, persistent deficits, and structural spending issues, which may affect economic growth and interest rates.
- Some European countries are increasing spending on defence and infrastructure, potentially paving the way for better growth.
- While technological breakthroughs and stimulus hopes have lifted sentiment around China, valuations of Chinese equities remain compelling.
- For multi-asset investors, volatility offers the chance to take advantage of market dislocations across asset classes.
Trade disputes and uncertainty over US economic growth have led to questions over a possible recession, contributing to a volatile investment backdrop. But where there is volatility, there is opportunity.
The Trump administration’s threat of tariffs has led to a rethinking of trade policy and protectionism around the world. It is also hastening the deglobalisation trend of recent years.
Additionally, with the US no longer willing to be the world’s police officer, countries and regions like the European Union (EU) are mobilising to look after their own security. Germany’s stimulus package, for example, is aiming to bolster the nation’s defence capabilities and revitalise its infrastructure.1
These actions signal a potential shift in Europe’s economic strategy, with some optimism that the EU is moving away from decades of fiscal constraint and paving the way for higher GDP growth.
Heightened near-term uncertainty could drive increased market volatility. But as multi-asset investors, volatility allows us to take advantage of market dislocations across asset classes and to find attractive entry points for areas of long-term opportunity.
The end of US exceptionalism?
The Trump administration’s ‘America First’ approach has set in motion several changes which could alter the relative attractiveness of different markets. And this begs the question of whether we are at the beginning of the end of American exceptionalism, and by extension the US bull market.
Uncertainty around the inflationary impact of the administration’s tariffs and headlines around layoffs by the US Department of Government Efficiency (DOGE)2 are potentially beginning to affect consumer and business sentiment.
Some estimates of real GDP growth – like that of the Atlanta Federal Reserve – have the US economy contracting, in large part driven by a deceleration in consumer spending, which makes up about two thirds of US GDP.3
Reduced spending could damage company profits, leading to lower investment by business along with job cuts, putting further pressure on consumer sentiment. This would create headwinds for US economic growth, increasing the possibility of a recession and interest-rate cuts. However, any inflationary pressures brought on by tariffs and limits on immigration could make rate cuts more difficult.
Where next for the US?
One market perspective is that a recession could be a quicker way to lower interest rates and reduce the government’s debt interest burden. Total fiscal spending for the US in 2025 is expected to be about US$7 trillion against US$5.1 trillion in total revenue, leaving a deficit of US$1.9 trillion, or about 6% of GDP.4
The US administration would like this to be reduced to 3%.5 But achieving this will be challenging as approximately 75% of US government spending is mandatory, on areas including social security, public health care, and interest payments on government debt.6 And discretionary spending includes areas which could also be difficult to reduce, like defence.
In short, the US faces a significant fiscal challenge. The combination of high debt, persistent deficits and the structural nature of government spending makes a quick or easy solution unlikely, in our view.
China compelling?
China continues to experience headwinds including an ageing population and shrinking workforce. Additionally, a fall in house prices across major Chinese cities has reduced consumer confidence on the back of a broader economic slowdown since Beijing lifted Covid lockdowns.
However, we believe that current valuations do not sufficiently reflect upside prospects, including the possibility of additional policy support from the government and the unlocking of China’s high level of household savings.
Furthermore, China’s government has pushed hard on innovation in the face of restrictions that have limited the country’s access to advanced semiconductors and related equipment.7 The DeepSeek artificial intelligence model is one example in practice of this innovation challenging Western players.
Valuations remain compelling in our view, with the market still trading at around 12 times forward 12-month earnings.
Sources:
1 FT. Germany’s Friedrich Merz strikes ‘game-changing’ deal to boost defence spending. 5 March 2025.
2 APnews.com. A comprehensive look at DOGE’s firings and layoffs so far. 22 February 2025.
3 Source: US Bureau of Economic Analysis as at Q4 2024.
4 CBO ‘The Budget and Economic Outlook: 2025 to 2035’ 17 January 2025. https://www.cbo.gov/publication/60870. (CBO projection from 2025).
5 Americanprogress.org. Scott Bessent’s 3 Percent Deficit Target Would Require Massive Cuts to Anti-Poverty Programs and Middle-Class Tax Increases. 15 January 2025
6 CBO ‘The Budget and Economic Outlook: 2025 to 2035’ 17 January 2025. https://www.cbo.gov/publication/60870. (CBO projection from 2025).
7 Guardian. Chip war ramps up with new US semiconductor restrictions on China. 3 December 2024.
Authors
Janice Kim
Associate Portfolio manager, Mixed Assets team
These opinions should not be construed as investment or other advice and are subject to change. This material is for information purposes only. This material is for professional investors only. Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell investments in those securities, countries or sectors. Please note that holdings and positioning are subject to change without notice. Compared to more established economies, the value of investments in emerging markets may be subject to greater volatility due to differences in generally accepted accounting principles or from economic, political instability or less developed market practices. MAR007278 Exp: 05/30.
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