Insurance Insights Q1 2025: Regional diversification is key amidst US policy uncertainty
While we are only at the end of the first quarter of 2025, rapidly shifting market narratives have already created a challenging environment for investors. Trump wasted no time after his inauguration to rollout a barrage of policies targeting trade tariffs, immigration policy and geopolitical negotiations. The resulting overhang of policy uncertainty is starting to weigh on consumer and business sentiment.
The US economy is still running strong, but a broader economic downturn – though still considered a risk scenario – is no longer unimaginable. Business investment may slow as corporates adopt a “wait and see” strategy in the face of unpredictability. Tariffs will result in a price shock and hit growth as real incomes get squeezed lowering overall demand.
For these reasons, US equities are facing headwinds and could continue to do so. It doesn’t help that US large caps are trading at elevated valuations. Low equity yields in the US probably makes a better case for fixed income. Another obstacle seems to be the release of DeepSeek’s artificial intelligence (AI) model which has raised some concern over large scale capex by tech firms.
What has been a bane for the US equities seems to have been a boon for their Chinese counterparts, though. Investor perceptions on Chinese stocks has rapidly shifted with the recognition that China is not too far behind in the AI space, if at all. The Chinese economy could reaccelerate with more forceful stimulus, and Chinese economic data pointed to strong activity during the Lunar New Year holiday.
European stocks are also having a moment. Select names may outperform as investors wager that European defence spending will have to rise significantly given Trump’s reluctance to prop up a costly and indefinite war in Ukraine. The bar for European equities is low given the very bearish starting point after a long period of challenging macro data.
International stocks outperforming US stocks highlights the importance of regional diversification. Even more so now that geopolitical risk premia is inordinately high. Gold is likely to continue its upward trend as a hedge. We believe the dollar and Treasuries should also do better than otherwise, as should other assets with perceived hedging and stability qualities.
Contrary to US Treasuries, higher EU military spending could imply higher sovereign bond yields across the European region. From a global credit perspective, spreads are still tight relative to historical standards and have the potential to widen, but all in yields are enticing. Loans may look better from lower risk standpoint.
Alternatives (global REITS, infrastructure, hedge funds, and commodities) are attractive relative to traditional assets as they offer a higher return-to-risk than US equities. Global infrastructure and hedge funds stand out.
Investment risks
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
