Key takeaways:

• US policy is likely to lead to stagflation this year
• Volatility in this market and a weakening dollar is leading investors to seek safe havens elsewhere
• We like emerging markets, and in particular Asia, for their diversification appeal
• China’s economy is stabilising and the government has room for further easing to counteract US policy

How have our macro and multi asset views changed since the start of the year?

Max Stainton: Three major things have happened in the past quarter which have affected the US macro outlook. First is the Liberation Day tariffs which kicked up the effective tariff rate. Then came the US-China détente which reduced those rates to more sustainable levels. Now, the US is struggling to strike up meaningful trade deals with other countries.

The result of all this is likely to be a supply-side stagflationary shock - that is, a hit to growth while inflation continues to rise, perhaps to around 3.5 per cent this year. It leaves the US Federal Reserve in a bind, between fighting inflation and rescuing the economy. We’re not expecting any rate cuts until the very end of the year (contrary to market expectations for more).

The outlook for Europe is for weaker growth, since it now has to react to this global trade shock. The picture is more positive for China, which has been able to stimulate more meaningfully in response to external pressures, and growth there is stabilising. 

The other big implication here is dollar depreciation. The dollar has been on a meaningful downward cycle for more than five years, with valuations at extremely high levels and now with US tariff policy applying even more pressure. 

Henk-Jan Rikkerink: What we’re seeing today is a fragmentation of the world order. The US wants to drive significant changes in trade and supply chains, and we’re at the start of a multi-year decoupling between it and China. China itself is trying to balance its external exposure and internal growth drivers.

All together, we think we are now in late cycle. Risks are relatively balanced - we are certainly not calling a recession. It’s easy to be overly defensive at a time like this, but there is still plenty of good stuff going on. Much of that is happening outside the US - diversification is more important than ever. 

Where does this leave the equity market?

Niamh Brodie-Machura: Let’s start with the US. There are certainly macroeconomic questions hanging over the US right now that Max has addressed. The stock market is now also up about five per cent this year. It has staged a remarkable recovery since its April lows in the aftermath of Liberation Day. So investors are still optimistic. 

I’d be more cautious. On the negative side, valuations are still very high and do not reflect that we are in an era of structurally higher uncertainty. Tariffs, meanwhile, have not had a massive bearing on earnings yet, but they are clearly still a factor. They will impact on company costs, supply chains, and prices. 

There are questions around the Big Beautiful Bill too, which the Senate passed early in July. The market has taken this as a positive since it will provide a fiscal impulse. But it does also raise fiscal risks over the long term. Economic data though look positive: the jobs market is holding up, as is the consumer market (even if sentiment is down).

So what you have is a fairly confused picture in the US where you’re not convinced that the macroeconomy can support stocks’ stretched valuations. What you’re looking for is individual parts of the market that you trust can beat earnings expectations. You probably have less confidence now than you did previously.

That’s one reason why diversification to other regions now is so important. Valuations in emerging markets are much more attractive. 

And what about the dollar?

HJR: The dollar used to be the ideal safe haven for investors. It was both an appreciating currency and steady at times of stress. Recently, it has performed neither function. 

We are now structurally bearish on the dollar, from a short to medium-term perspective. US trade policy is one of the drivers, valuation is another. It will probably remain volatile as more investors reduce their exposure. 

At the same time, we’re not calling an end to dollar supremacy. This is still the most liquid and most deeply integrated market in the world. Nor are there any credible alternatives as a world reserve currency for now. So our feeling is that yes, the need to hedge has gone up (especially if you’re a non-dollar denominated investor). Again, diversification is key. But the dollar is not dead. 

How does the situation look in Asia?

Lei Zhu: There are a few major drivers to watch now. There is the US-China decoupling process. That’s contributing to a broader reconfiguration of supply chains across the region, which is benefitting India and the Asean countries.

Another factor is monetary easing and policy-driven stimulus across the region. Here, Asia - with the exception of Japan - differs from Europe and the US. Central banks have been cutting rates, and still have further to go. This is providing support across the region and stimulating domestic consumption. China likewise has been easing, and to some extent exporting deflation.

And China more specifically? How are you allocating towards China?

LZ:  The People’s Bank of China has been cutting gradually, but it wants to keep some room for further easing as talks with the US progress.

The property market is stabilising, but it is too early to say that it is rebounding. The crisis first kicked off four years ago with the collapse of property developer Evergrande. Property crises usually last for around five to seven years, so we are probably somewhere near the bottom now. Sentiment is starting to improve. The high yield market for property bonds has been rebounding for the past few months.

HJR: The question around China and emerging markets is one of relative attractiveness. We do think, relative to the US, these regions look good. We hold an overweight to China in our equity allocation, though it has run a reasonable amount in the past few months. The fundamental story appears stronger too, with margins looking decent compared to a year or two ago and off the back of a good earnings season. 

The extent of China’s artificial intelligence (AI) capabilities have surprised the world this year, and the government is looking to support that. The government really does matter - how and where they stimulate, how they transition the economy away from the US, how they support more domestic consumption and advanced manufacturing services, and so on. 

So overall we do have a preference for emerging markets over developed. As well as China, India and Korea look attractive now. 

Which themes and alternative assets are you watching?

NBM: AI is clearly front of mind. Our analysts have seen that customer demand in the US is absolutely focused on AI. Enterprise adoption is gathering steam now, which means productivity gains and cost savings for companies. But we’re not sure this will manifest immediately. When it comes to big technological revolutions like this, it’s not always the early adopters who prove to be the big winners over the long term. 

We like the picks and shovels, the enablers, which haven’t necessarily been hyped by the market. There are areas that look bubble-ish, but you can’t ignore this theme, because it will drive change globally. 

LZ: Investors are looking for safe haven alternatives. Some are exploring Asian fixed income. This is a more developed part of the emerging market universe, so holds that diversification appeal.

This is one of the few regions where you can find a triple A rating and still have some meaningful yield - that is why the Singapore dollar is a very hot topic right now. In addition, as I mentioned, most Asian central banks are cutting rates, so you are not only gaining from the carry, but also capital gain and capital appreciation. 

Asia - and in particular China - high yield has also quietly been delivering, with a very attractive valuation.