In the middle of difficulty lies opportunity

The world today feels very different to the way it did just three months ago.

China has upended the AI narrative, a new US President has been quick to stamp his authority, and longstanding global alliances suddenly feel more fragile. Against this backdrop, inflation expectations have risen, the growth outlook is softer, and investors are facing market ructions on a seemingly daily basis.

Yet despite the change, we still hold a broadly constructive outlook for risk assets – albeit a more nuanced one. For now.

Of course, our key message for investors remains – stay the course and remember your long-term investment strategy. But, at a time of such rapid change, we implore investors to allow for some flexibility in their approach. As a great economist once said, “When the facts change, I change my mind.”

And a second Trump administration has brought no shortage of that.

In less than three months, Trump has signed more than 100 Executive Orders, signalling a clear intention to act on policy with little regard for others’ opinion. While this quantum of Executive Orders can be unsettling by itself, the frequent back peddling on these measures, in particular tariffs, has left markets on edge.

Unsurprisingly, US Policy Uncertainty sits just shy of its highest point outside the pandemic. Meanwhile, US Trade Policy Uncertainty is at a record high and almost twice the level it reached during Trump’s first presidency.

Uncertainty is pervading

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Add both flippant and often contradictory rhetoric, and not only is it difficult to assess the desired end game for tariffs, but also how Trump delivers a more competitive US while maintaining robust growth, lower prices and a higher stock market. After-all, higher tariffs and a slower easing cycle seem incongruent with a weaker US dollar – something Trump openly seeks. In the end, something will need to give. What that is, remains uncertain.

Of course, the longer this uncertainty lingers, the more difficult it is for business to invest, and the weaker consumer confidence becomes. Indeed, in March, US consumer confidence declined for the fourth consecutive month, while investor sentiment is now at its lowest point – outside of the pandemic – since the global financial crisis.

Investor sentiment has cratered

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Taken together, these factors should see spending soften, growth weaken and corporate earnings decline. But while credit spreads recently widened to the highest point since September last year, they are hardly flashing recession.

Indeed, the US economy is starting from a position of relative strength. While we expect US growth to soften over 2025, we don’t foresee a collapse, with the US still likely to lead growth across most developed markets. Moreover, bearish investor sentiment is often a contrarian indicator for stocks. And while the Fed’s easing cycle is unlikely to gather momentum in the near-term, its recent decision to slow quantitative tightening should add liquidity to the market, acting as a cushion for investor discomfort.

For investors, the spectre of Trump and tariffs will linger for some time. While we continue to assess downside risks, we are also alert to opportunities that may present because of the disruption. In fact, for some regions, bad news may eventually become good news.

Europe has been awoken by Trump, emerging from austerity to a state of fiscal expansion. In a bid to do ‘whatever it takes’, the European Union has outlined plans to raise defence spending by up to 800 billion euros over the next four years, while the region’s largest economy, Germany is set to unlock its debt brake and push upwards of half a trillion euros toward infrastructure and defence. This fiscal injection comes at a time when the European Central Bank is aggressively cutting interest rates, with a further 75 basis points of easing expected this year.

To be clear, the growth outlook for Europe remains modest and the record valuation gap between US and European equities has narrowed over recent months. But notwithstanding the possibility of tariff escalation and geopolitical headwinds, the potential reindustrialisation of Europe could mark a turning point for a region where equities have long underperformed US peers.

The valuation discount has narrowed

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Elsewhere, the outlook for Japanese equities has also improved as the virtuous wage-price spiral continues.

Private consumption and corporate profits are both tracking higher, prompting further capex investment by business. While we expect the Bank of Japan to hike twice more this year, we believe this is largely priced into markets. Alongside the continued secular change to corporate governance, Japanese earnings revisions remain the most promising across the major regions.

What this means for our diversified portfolios

In response to this evolving backdrop, we made key adjustments to multi-asset portfolios over the first quarter, while ensuring the integrity of each portfolio’s risk profile was maintained throughout.

This included a reduction in our broad US equity market exposure, and an adjustment to our portfolio hedging in the process.

Despite the recent fade in US exceptionalism, in real terms, the US dollar is still near an almost four decade high. Trump wants the US to be more competitive and a softer US dollar will likely be needed to deliver this. With asset allocators overweight the US for some time now, an anticipation of US dollar weakness could see some of the strong asset flows reverse for a period. 

The move has taken US equities to benchmark, while we retain a modest preference for US-tech related shares within that segment of portfolios. The proceeds were used to increase our mild overweight to European equities and upgrade Japanese shares within portfolios. This has seen us shift slightly long the Australian dollar versus the USD.

Additionally, we modestly increased our position in listed infrastructure, while reducing the size of our mild underweight to high yield credit. In the case of the latter, the purchases favoured the US where spreads recently widened by close to 100bps from early 2025 lows. Carry remains attractive across high yield and the position allows us to offset some of the loss in US beta from the reduction in US equities.

Elsewhere, we retain our mild overweight to gold given geopolitical and fiscal uncertainty. The exposure continues to provide a differentiated source of return for portfolios.

We remain at benchmark to duration overall, with a modest preference for the long end of the curve. While yields have declined since the start of the year, the position continues to provide solid carry and should prove a strong diversifier for portfolios if growth stumbles more than expected.

Uncertainty is never easy to navigate; but as a smart person once noted, “in the middle of difficulty, lies opportunity.” A diversified long-term investment strategy – that can be tactically adjusted as conditions evolve – should provide the best chance to steer through the market noise and capture opportunities as they present.