The first half of 2025 has been particularly volatile, with market performance marred by different types of uncertainty.
There was, of course, Trump's "Liberation Day" and the announcement of tariffs on all imports to the USA. That, in turn, disrupted trade and brought an extra layer of uncertainty to investment.
Then there is the fear that, by damaging supply chains, the same tariffs will fan the flames of inflation, stopping central banks from easing the price of credit further. This would be particularly troublesome in the United States, as U.S. debt serves as a benchmark for the cost of credit for much of the world.
Other threats include conflicts involving nuclear powers, which pose a danger to the world at large. In economic terms, they may lead to even more supply chain disruption. They have also forced governments in the West to abandon the so-called "peace dividend".
With the relative calm in world affairs over much of the last decades, governments have been able to limit military spending. This, in turn, made government funds available for other purposes. Now that luxury is gone. As military spending increases, hard choices will have to be made.
So what's in store for the 2nd half of the year?
Less surprises in U.S. markets
In the U.S., there are reasons to believe that, following a frantic few months, the Trump presidency will return to a more predictable rhythm in terms of surprising investors.
The main reason is the Mid-term elections that are to be held in the U.S., in the Fall of 2026.
Trump currently holds both the House of Representatives and the Senate, allowing him to pass new legislation with relative ease. Losing one or both parts of Congress would change that. The President, therefore, needs voters on his side in about 16 months.
To get them to vote for his party, he'll need to improve the Business climate and bring more certainty to the economy. A more transparent framework for tariffs will be essential for this purpose. The economy and job market must be in a decent position for his party to stand any chance.
Also, it's worth keeping in mind that, according to polls, about 62% of Americans own stocks, either directly or through funds or 401(k) plans (pension funds). That means that stock market performance matters. Therefore, it'll be in Trump's interest to let businesses operate in a more favourable climate and for stocks to perform well.
Cuts in key rates and taxes may help the U.S.
Two other factors should help Trump achieve his goal.
Firstly, interest rates: while the Fed hasn't lowered interest rates recently, previous interest rate cuts are still working their way through the economy and should continue to do so.
Furthermore, the latest Fed dot plot shows that, while the number of participants expecting interest rates to be cut this year has decreased, they unanimously believe that interest rates will be lower by the end of 2026.
That means the anticipated trend to cheaper credit remains in place, albeit at a slower pace. As markets begin to anticipate more affordable credit, they're expected to hold up relatively well.
Secondly, tax cuts and deregulation are likely to boost economic activity and profits. For the time being, companies are being held up by uncertainty.
However, any glimmer of stability could well release the animal spirits in the U.S. economy. As for the U.S. consumer, as we are well aware, any injection of liquidity - whether through higher wages or a lower tax burden - will lead to an increase in spending, thereby boosting the economy.
There are, therefore, reasons to be hopeful concerning the U.S. economy and to remain invested in the world's #1 stock market.
Hope looms for Europe
Europe's challenges look far more daunting. Remaining competitive while complying with far more stringent regulations, higher tax burdens, and high energy and labour costs is not easy. Europe is also struggling to maintain its leadership in some of its most emblematic sectors, while being heavily dependent on the U.S. for its technology and China for its energy transition.
In the immediate future, things are likely to get better.
Germany's increased government spending and investment should prevent the country from falling into negative growth this year and maintain a stable trajectory in 2026. It should also help its European partners.
Acceleration, but not so fast
Also on the plus side, the European Central Bank's rate cuts are easing the economy, and cheaper credit should bring some relief to consumers, who have been scarred by a period of high credit costs and galloping inflation.
There is some hope that the Eurozone will achieve moderate growth in 2025, with a slight acceleration expected for 2026. But on the whole, we believe other markets remain more promising.
Given the outlook, there's little to entice us to get into the EUR markets. In Europe, our preferred market is Poland, which boasts strong consumer demand with considerable scope for growth. The country is also likely to capitalise on the expected surge in German investment, as well as the eventual end to the war in Ukraine.
Asia offers a more diverse outlook.
Japan looks the most challenging market. The country's dependence on exports, in general, and on the U.S. and Chinese markets in particular, leaves it in trouble. The U.S. is determined to impose tariffs, while relations with China are strained. Furthermore, as is the case with Germany, Japan faces competition from China in sectors such as electronics and automobiles.
Then there's the issue of credit costs. Japan has long had government debt above 200% of GDP. That wasn't a problem when credit was cheap, with the Bank of Japan aiming for a 0% yield on the 10-year JGBs.
Those days are gone. Higher interest rates elsewhere have allowed investors to demand higher yields in Japan. Japan's 30-year bond is nearing its highest level in decades, at nearly 3%.
That means the share of tax receipts going into tax payment[DS1] is rising fast, which limits the government's capacity for new policies. All this means Japan is in a tight spot at the moment, and the situation is unlikely to develop favourably over the next few quarters. We no longer invest in Japan.
South Korea faces different threats
South Korea shares a similar dependence with Japan in its export markets. The other problem has been political uncertainty.
Following the impeachment of the President and attempted coup d’état, Seoul is still trying to regain some credibility while dealing with the challenges posed by the Trump tariffs. Again, the outlook for the next few quarters doesn't look bright.
Real estate is a national vault in China
China is on a different level. The country has been trying to boost private demand for several years now, in the hope that a stronger domestic demand would reduce its dependence on exports. It hasn't gone very well.
Two reasons for that: Firstly, during the pandemic, Beijing did not come the rescue of companies or consumers as capitals in the West did. For that reason, economic actors in the country have learnt to be self-reliant and are now restocking their depleted savings.
Secondly, real estate has served as one of the leading stores of value in China. As real estate promoters were reined in and the sector collapsed in 2021, many households are now sitting on properties that are worth less than they paid for them. Moreover, prices are still falling (in fact, they've been falling systematically since early 2022). That, in turn, weighs on private demand, which remains sluggish.
But Chinese innovation points to the future
On the plus side, Beijing continues to devise new ways of supporting the economy and is not finished with implementing new stimulus measures.
Perhaps more importantly for investors, the sums that weren't invested in real estate have been directed into more productive sectors of the economy.
In the last few years, R&D spending in China has been growing rapidly (+8.7% in 2024, compared to +1.7% in the U.S. and 1.6% in the EU). The country looks set to overtake the U.S. in R&D spending in absolute terms.
Coupled with a vast reservoir of qualified scientists, that amount of capital has boosted China's innovation capacity. Much has been made of the country's extremely problematic demographic profile. The truth is that by replacing a rice farmer with a qualified scientist (for instance, by training its population), China can continue to grow at apace.
The country now claims leadership in a vast number of new technologies. That makes relations with the U.S. difficult as Washington correctly perceives Beijing as a threat to its hegemony.
But China is now vital in many key sectors. Making do without China is highly challenging, particularly in the short and medium term. Hence, the two countries will need to reach a mutually beneficial agreement. We continue to invest in China, but we are keen to see further developments on the trade front before increasing our exposure to the country.
Emerging markets with internal possibilities
We currently hold exposure to several emerging markets, including India, Indonesia, Brazil, and Turkey. Almost all share the promise of an internal market with huge potential, which offers a haven from the current turbulence in trade with the USA.
Doubts about the impact of tariffs on supply chains also impact these markets. However, all have adopted pragmatic policies, remaining neutral in the various conflicts and selling their goods worldwide.
As the situation on the trade front stabilises and the Fed lowers interest rates, mostly next year, they should benefit from cheaper financing that should help them thrive.
Except Brazil, all have been cutting interest rates, and with credible monetary policies and a determination to grow, these countries look like a decent bet both in the long term and over the next few quarters. Less volatile than the other two, India and Indonesia are part of our balanced portfolio, as is Mexico.
Mexico's paradox: strength and weakness
Far more dependent on the U.S. market than the others, Mexico is nevertheless playing its cards well. Its sizeable domestic market is rebounding following several interest rate cuts, and this behaviour is supposed to continue in the second half of the year.
It's also worth noting that Mexico's integration into the U.S. supply chain is so complete that any restrictions would pose massive problems for U.S. companies.
Hence, the White House has been asked by several U.S. industrial giants to go easy on Mexico. This far it has done so. Given the lack of valid alternatives to supply the USA, we expect this to continue.
Diversification is still king
Despite headline risks, the U.S. remains a core investment destination. Policy shifts and macroeconomic tailwinds may gradually lift confidence, helping equities hold or gain ground in the second half of the year.
Beyond that, a satellite approach seems wise: cautious in Europe, selective in Asia, and constructive in emerging markets where fundamentals remain sound. Diversification is a key to a balanced portfolio and for better use of global opportunities.
See our updated portfolio suggestion:
