Global Asset Allocation: The View From Europe

Outlook: New World Order

• We remain cautious on risk assets as the trajectory of global growth and inflation face potential challenges from disruptive trade policies.
• US growth expectations continue to slow as negative sentiment surrounding tariff impacts weighs. Despite tariff threats on growth, Europe and China policy support could provide an offset. 
• Disruptive trade policies could force central banks to make uneasy choices whether to support growth despite threats of higher inflation, which is most pronounced in the US. 
• Key risks to global markets include the impact of escalating trade wars on growth and reaccelerating inflation, central bank missteps and geopolitical tensions.

Themes Driving Positioning

Duelling mandates

Whilst the US Federal Reserve has faced challenges in its dual mandate of maximising employment and price stability in the past, today’s environment may soon become acutely difficult. After nearly reining in what they mistook as ‘transitory’ inflation post‑COVID, they could now be facing new inflationary pressures from tariff‑led trade policies. These same policies, however, could also weigh on economic growth and lead to rising unemployment. Higher prices, lower growth and rising unemployment are an unwelcome confluence for Fed policymakers also facing political pressure to lower rates. For now, the labour market remains intact, allowing the Fed to stay on the sideline. This could change quickly, though, and markets are already betting that rate cuts may be coming sooner rather than later as trade policy weighs on growth. Given the Fed could soon find itself duelling its dual mandates, we’re cautious on risk with a tilt towards inflation‑sensitive assets.

Spring thaw?

What had started with targeted tariffs towards China back in February by the new administration quickly escalated into a global trade war, especially after the 2 April ‘Liberation Day’ announcement of a baseline 10% tariff and reciprocal tariffs. A week of extreme volatility followed, and the administration seemed to relent by announcing a 90‑day pause, which was cheered by investors hoping that the extreme tariff measures were just part of a negotiating tactic. Recent headlines suggest that maybe it is working, with many countries seeming to be in negotiations with the US, and, notably, it appears that China is open to talks whilst also exempting some goods from its recently imposed retaliatory tariffs on the US. Whilst much uncertainty remains on the impacts on growth and the path of the negotiations, there have been some signs of thawing tensions in Washington, D.C. this spring. Against the still uncertain path ahead, we’ve moderated exposure to risk assets.

 

For a region-by-region overview, see the full report (PDF).