Resilience through uncertainty

The first half of 2025 wasn’t short on distractions: geopolitical tremors, policy pivots, and a market perpetually recalibrating expectations. Looking beyond the headlines though, the first half ultimately delivered more than it threatened. 

vid-01

Equities, while hardly spectacular compared to recent years, notched solid absolute returns – with the MSCI World Index up more than 7% over the first six months of the year.

Considering our call at the start of the year was for mid-single digit returns, we’re not surprised by the market’s positive direction. The conditions we expected to support risk assets – moderating inflation, lower interest rates and ample liquidity – largely materialised.

That said, these returns came against a backdrop of sharply decelerating global growth, renewed trade friction, escalating conflict in the Middle East, and a softer earnings outlook.

So, were full-year gains simply pulled forward into the first half? Or can markets continue to grind higher into year-end? We believe the latter is possible – but the margin for error has narrowed.

Equities were solid rather than spectacular

img-01

Source: S&P Global, STOXX, Tokyo Stock Exchange, SSE, MSCI, Bloomberg, Macrobond, ANZ CIO

As we pass the halfway mark, the investment landscape continues to be defined by elevated valuations, policy uncertainty and a testing geopolitical environment. Markets are increasingly normalising the abnormal – absorbing shocks that, in previous cycles, might have derailed sentiment more meaningfully.

In this context, investors will need to remain patient, diversified, and tactical – looking through the noise to focus on fundamentals. No small feat, given many of the uncertainties that weighed on investor confidence over the first half remain unresolved.

Accordingly, our key watchpoints for the second half are largely unchanged: tariffs and trade policy, fiscal dynamics, geopolitical risk, and corporate earnings. Each of these has the potential to shape both sentiment and asset pricing in the months ahead.

The US equity market continues to appear rich

img-02

Source: FactSet, Bloomberg, Macrobond, ANZ CIO

Amid the tariff U-turns and geopolitical brinkmanship, July 9th and August 12th have quickly been forgotten as potential landmark days for global trade. Peak-tariff uncertainty has likely passed, and we expect further trade deals to be announced, but the market is close to its all-time high and trading at a multiple of 22x forward earnings – the same levels following Trump’s election, but now with lower earnings expectations and higher uncertainty for corporates. Second quarter earnings may yet surprise to the upside, but guidance will be equally important.

Absent an inflation shock to compound the rising costs of tariffs, the primary concern in the near-term is growth. ANZ Research expects the US to avoid recession but has forecast growth of just 1.5% this year. The US Federal Reserve (Fed) has been patient in cutting rates and importantly has room to lower interest rates should growth deteriorate more meaningfully. We expect the Fed to cut again in September, followed by another reduction before year-end and again in early 2026. 

For equites, the timing of rate cuts is consequential. Slowing demand is expected to stifle the ability of corporates to pass tariffs through to consumers, likely squeezing profit margins.

Regional valuations are mixed

img-03

Source: FactSet, Bloomberg, Macrobond, ANZ CIO

While US equities continue to look expensive, other regions appear more reasonably priced. Europe and Japan are trading at or below long-term averages – both remain our preferred tactical exposures. Japanese equities are supported by strong balance sheets, improving corporate governance and accelerating share buybacks. 

European equities have arguably benefitted from rising geopolitical tensions. Defence-led spending, including the recent NATO agreement should support fiscal expansion. At the same time, the European Central Bank has cut interest rates by 200 basis points over the past 12 months and monetary policy is no longer restrictive. We hold a mild overweight to both regions, though with European equities looking increasingly crowded, we do not upgrade further at this time.

Central banks have declared concerns

img-04

Source: Official Monetary and Financial Institutions Forum, ANZ CIO

If the geopolitical backdrop has benefited Europe, it’s harder to argue the same for the US. A recent survey of 75 central banks conducted by the Official Monetary and Financial Institutions Forum showed the US dollar ranked only equal-seventh among currencies that central banks plan to increase holdings in over the next two years. A sharp decline from first place last year. Seventy per cent cited the US political environment as a deterrent – closely followed by geopolitics and US fiscal policy.

The latter remains a key watchpoint, particularly over the next quarter. The US debt ceiling “X date” is fast approaching – currently anticipated to be between early August and late September. At the same time, the pathway for Trump’s One Big Beautiful Bill Act remains unclear. We expect resolutions to both, but each adds a layer of uncertainty at a time when equity and bond markets are already nervous.

Yields have resumed a steady decline over the past month, but the spike in 30-year Treasury yields above 5% in late May is a reminder that markets remain sensitive to fiscal risk. Trump’s proposed bill is expected to add at least $3 trillion to federal debt by 2034. Sooner or later, investors are again likely to demand a higher risk premium.

This mix of factors has led us to continue gradually trimming our broad-cap US equity exposure over the past quarter. A reduction in late June followed similar moves in mid-April and late March. We now hold an underweight to broad-cap US shares, with a tactical preference for mega-cap US tech stocks – resulting in a mild underweight to the US overall.

Gold continues to be well supported by geopolitical uncertainty

img-05

Source: LBMA, Matteo lacoviello, Bloomberg, Macrobond, ANZ CIO

Elsewhere, we continue to see a favourable outlook for gold. The precious metal has been another beneficiary of geopolitical uncertainty and waning US exceptionalism. That same central bank survey showed a net 32% of central banks plan to increase their allocation to gold over the next 24 months – more than double compared to last year. We trimmed our overweight to gold in April following strong performance but remain mildly overweight.

Defensively, duration continues to serve as a key ballast within portfolios. We maintain a preference for the long end of the curve on a duration-adjusted basis. While equity–bond correlations have at times been inconsistent, our allocation – like most positions over the first half – has incrementally contributed to returns and at times provided meaningful diversification.

The global investment landscape has arguably never been more complex. Yet, multi-asset portfolios delivered strong risk-adjusted returns over the first half of the year – a clear reminder that diversification remains one of the most effective tools for navigating market unrest.

Looking ahead, we continue to see opportunity for investors who remain disciplined, focused on fundamentals, and well-diversified across asset classes and geographies. In an environment defined by uncertainty and transition, this approach offers the best chance to manage risk and participate in upside as it emerges.