Quarterly Global Asset Allocation Outlook | Q2 2025

Balancing risks and opportunities

Looking ahead to 2025, prior to the US election, we were optimistic about the downward path of inflation and central bank interest rates, and an upturn in global growth. This led us to embrace risk, though enthusiasm was tempered by the extreme valuation of some assets, notably US stocks and high yield bonds. Since then, some risks have grown.

Leading indicators may be improving, but the use of tariffs could undermine growth. US consumer confidence appears damaged by the threat of tariffs, government layoffs, forced deportations, and policy volatility, with consumer spending down in January. Business confidence may also suffer, potentially dragging on global growth. Inflation has picked up in many countries, which could slow future rate cuts. Geopolitical risks have increased with the new US administration upsetting neighbours, Europe, and the Middle East, raising anxiety levels.

Despite these risks, we think the global economy will accelerate, helped by central bank easing and rising real wages. Also, there are new opportunities. If President Trump brings peace to Ukraine and the Middle East, it could boost risk appetite, though possibly be bad for gold. European countries are confronting risks from Russia without US support, implying more defence spending and a deeper European military industrial complex, which could be good for European economic growth. The OPEC+ promise to boost production from April has weakened oil prices, potentially dampening inflation and boosting spending power. Chinese stocks have performed strongly over the last 12 months, with improving investor attitudes. The struggles of mega-cap US share prices have partially reduced valuation excesses.

Rising risk appetite amid easing central banks

We expect the global economy to accelerate over the next 12 months as central banks ease and real wages grow, boosting risk appetite. On the downside, the US economy may face a growth pause, and trade conflicts pose risks. Geopolitical tensions are also rising.

Our projections assume global GDP growth will improve, inflation will flatten but stay above target, and that major central banks will ease at a slower pace, with the BOJ tightening. We expect that yield curves will steepen, credit spreads will widen slightly, and defaults will rise from low levels. The US dollar is expected to weaken, especially against the yen, while commodities will benefit from global growth and USD weakness.

Improving growth should benefit cyclical assets such as commodities, REITS and non-US equities, but the bottoming out of inflation could drag on most assets. Geopolitical risks may boost gold and commodities, though peace in Ukraine and the Middle East could have the opposite effect. Performance leadership changes could negatively impact previously leading assets like US equities, private equity, and Bitcoin.

Yen and Euro show strength

Among developed world currencies, Figure 13 shows the Japanese yen remains the most undervalued when compared to historical norms in real terms. With the Bank of Japan (BOJ) tightening its monetary policy while most other central banks are easing, and with 10-year Japanese government yields at levels not seen since mid-2009, the yen has begun to strengthen. This trend is expected to continue over the next year, potentially making the yen the strongest major currency, while the US dollar is anticipated to weaken.

The euro, although not as undervalued as the yen, has also shown strength due to higher bond yields driven by promises of increased government spending. The gap between US and German yields has recently narrowed sharply, coinciding with the euro's strengthening. With low initial expectations for German growth and a substantial fiscal package from the new coalition (potentially up to €1 trillion or nearly 25% of 2024 GDP), significant growth in Germany is expected over the coming decades. Additionally, increased defence spending across other European countries is likely to boost growth throughout the region.