Our macro base case over the next 12-18 months sees the global expansion continuing, but with considerably more risks in both directions.
Our macro base case over the next 12 to 18 months sees the global expansion continuing, with inflation remaining somewhat sticky but at tolerable levels for policymakers. There is, however, a high degree of uncertainty about US domestic and foreign policy and the policies enacted by other regions in response.
Well-diversified portfolios are therefore essential to protect against both the downside risk that trade tensions lead to a fall in business confidence and recession, and the risk that inflation re-emerges and pushes bond yields higher.
Macro: Global growth remains resilient, with moderate amounts of new fiscal stimulus announced in the US. Tariffs are levied against China but the new US administration stops short of a universal tariff. China continues to announce support for its economy. Europe cuts interest rates more rapidly than the US given lower inflation risk in the region. See Exhibit 30 for details of our expectations for Trump’s policies vs. those discussed on the campaign, and our expectations for the rest of the world’s (RoW’s) reaction.
Markets: The environment is pro-risk given the resilient economic backdrop. US equity performance broadens across sectors while there is scope for European and Asia stocks to follow if policy support is sufficient. Core fixed income delivers returns in line with coupons.
Macro: A global trade war leads to a re-acceleration in inflation while hurting growth across the world. Punitive tariffs on China stymie a recovery despite stimulus, while the implementation of a universal 10% tariff on US imports hits Europe particularly hard. Tax cuts and anti-immigration policies further fuel US inflationary pressures, while oil prices remain elevated with tensions in the Middle East offsetting increased US production. The Fed is unable to cut rates to support the growth outlook given elevated inflation.
Markets: A negative environment for stocks, with interest-rate sensitive sectors hit hardest. Rising yields on core fixed income lead to losses as stock-bond correlations remain positive. German Bunds outperform US Treasuries. Gold, real assets and commodity strategies outperform cash while hedge funds that can benefit from higher volatility also perform well.
Macro: Tough protectionist measures and geopolitical uncertainty hit business and consumer confidence, forcing companies to pull back on hiring. Tariffs are levied on China, but companies are forced to absorb higher prices through weaker margins given lower consumer confidence. Interest rates are cut by considerably more than currently priced to support the economy.
Markets: The negative stock-bond correlation returns. There is downside for stocks, but with higher quality and income strategies outperforming, while the environment is very positive for core fixed income, with significant capital upside.
Macro: Growth accelerates driven by big fiscal stimulus and an artificial intelligence-induced productivity boom. Trade tensions ease as the threat of tariffs results in new trade deals, and geopolitical tensions calm. Rising productivity keeps inflation in check despite a tight labour market, allowing central banks to cut interest rates back towards neutral despite still solid growth.
Markets: A very positive environment for stocks globally, particularly in emerging markets. Fixed income also sees strong returns as interest rates move lower, and credit spreads tighten to new record levels.