Einstein is often quoted as saying, “Insanity is doing the same thing over and over again and expecting different results.” While it has never been proven that he said this, the principle holds true in scientific experiments, where repeatable results are essential for validation. Conducting an experiment in the same way should yield the same outcome. However, in the world of political economy, circumstances are constantly changing. Some policymakers believe that the same action can produce different results depending on the context. Several policy decisions made in October are testing this idea, with varied outcomes that matter to investors.

When you have a hammer, everything looks like a nail

On October 10, U.S. President Trump threatened China with 100% tariffs in response to China’s announcement of new export license requirements for products containing rare earths. Beijing’s policy mirrored U.S. export license requirements for semiconductor and technology exports to China. At the same time, U.S. President Trump criticized China for halting soybean imports and for insufficient efforts to block fentanyl exports to the U.S.

Given the standoff in April, which saw bilateral trade tariffs between the world’s two largest economies reach triple digits, the latest threat is widely seen as a negotiation tactic to refocus the dialogue. Nevertheless, it triggered a spike in market volatility. Both sides resumed negotiations at the ASEAN summit in Kuala Lumpur, where U.S. Treasury Secretary Bessent indicated that China might delay the rare earth export licensing requirements in exchange for the U.S. dropping the 100% tariff.

Tariffs are likely to put pressure on growth, inflation and corporate profitability, but we believe the worst of the tariff announcements is behind us. The Department of Commerce is still reviewing various Section 232 investigations, but we expect ample exemptions and carve-outs to mitigate economic damage, especially ahead of next year’s mid-term elections.

The U.S. federal government shut down non-essential services on October 1 after the Senate failed to pass appropriations bills to fund government spending. Senate Democrats withheld approval, demanding the extension of health care subsidies. The standoff continues and could potentially lead to the longest U.S. government shutdown in history. The direct impact on gross domestic product (GDP) should be manageable, as federal workers will receive back pay once the government reopens.

However, investors face two key challenges. First, the shutdown, along with tariffs and immigration policy, creates uncertainty for businesses. While tech companies continue to invest heavily in artificial intelligence (AI) infrastructure, other sectors are slowing investment and hiring. Second, economic data reporting has been disrupted. Although the September consumer price index (CPI) inflation data was released, the September non-farm payroll report was missed, and this may continue for October if the shutdown is extended into early November. Even though the Federal Reserve (Fed) can rely on private sector data and anecdotal feedback from businesses, the quality of decision-making could be affected, especially as the Federal Open Market Committee (FOMC) faces pressure from the Trump administration to cut rates. The latest 25 basis points (bps) rate cut was expected given the pre-shutdown job market trends, but future moves may be harder to justify without reliable data.

PM comes, PM goes

Hung parliaments without a clear majority make policymaking challenging. In France, Prime Minister Lecornu resigned on October 6 after just 26 days in office, becoming the sixth prime minister since 2022. President Macron’s Renaissance Party has failed to form a coalition with either the left or the right following the elections in 2024, which has contributed to the fragility of the government. Lecornu was reappointed days later and must now convince parliament to pass the 2026 budget, balancing fiscal deficit reduction with parliamentary buy-in, as the left opposes raising the retirement age and other pension reforms. France’s fiscal situation has already pushed government bond yields higher, despite European Central Bank (ECB) rate cuts over the past two years. S&P downgraded France’s sovereign rating to A, while Moody’s maintained its Aa3 rating but revised its outlook to negative.

Japan also saw a leadership change. The Liberal Democratic Party and its coalition partner lost their majority in the House of Representatives in 2024 and performed poorly in the House of Councillors in 2025. Prime Minister Ishiba resigned as LDP president, and Sanae Takaichi was elected as the new party leader. Despite losing its long-time coalition partner, Komeito, the LDP formed a new coalition with the Japan Innovation Party, though still without a lower house majority. Takaichi was successfully voted in as Prime Minister.

PM Takaichi currently enjoys strong public support, which could bring much-needed political stability to Japan. She advocates an expansionary fiscal policy and a dovish stance on monetary policy, contributing to investors’ expectations that the next Bank of Japan (BoJ) rate hike will be delayed.

Overall, fragmented parliaments in France and Japan make it difficult to implement unpopular fiscal consolidation measures. This unstable political equilibrium forces leaders to balance the demands of bond market vigilantes (as seen in the UK in September 2022) with voter support. As a result, long-term yields on developed market government bonds may remain elevated.

China’s next five years

The party’s fourth plenum concluded with a communiqué outlining priorities for China’s 15th Five-Year Plan (2026–2030). The new plan focuses on “high-quality economic development,” technological self-sufficiency, and a shift from physical infrastructure investment to the improvement of quality of life. No explicit annual growth target was set, but China aims to become a “moderately developed economy,” implying a per capita GDP of USD 25,000 by 2035, or about 4.5% annualized growth.

The plan prioritizes innovation in core technologies, especially AI, semiconductors and aerospace. Improving quality of life and stimulating consumption are emphasized, with policies favoring emerging sectors and services. Defense modernization and national security remain central, alongside efforts to address risks in the real estate sector and promote sustainable property development. The energy agenda shifts to “green transformation,” focusing on efficiency and a diversified mix, benefiting new energy and advanced technologies.

Signals and noise

2025 has been a noisy year, filled with political rhetoric and policy shifts. Yet, some clear signals have emerged that investors should not ignore.

First, the Trump administration will continue to use tariffs as leverage in trade negotiations and other aspects of foreign policy. While the ultimate impact on inflation and growth may be manageable, the ongoing transformation of global supply chains is prompting businesses to diversify their sourcing, which could benefit emerging economies such as those in Southeast Asia. The need for transportation and related infrastructure is also likely to increase.

Second, developed market governments may struggle to reduce fiscal deficits and debt, given voters’ reluctance to accept higher taxes or reduced benefits and services. An aging demographic adds further pressure. Investors may demand a higher term premium for government bonds, keeping long-term yields elevated. In contrast, governments with stronger fiscal discipline could be rewarded.

Finally, China faces cyclical challenges, including a housing market correction and a soft job market. The government’s long-term plan to boost technology and advanced manufacturing is sensible, but preventing excessive competition—especially in electric vehicles and renewable energy—will be key to making these developments commercially viable. Improvements in living standards align with China’s rising income levels and could create new business opportunities if the private sector is allowed to provide care services. However, some sectors may face margin pressure as they strive to deliver value-for-money services to the public. Active management will be essential in identifying new opportunities.

Global economy

• Amid the government data drought due to the shutdown, the Federal Reserve voted to cut interest rates by 25 bps at its October meeting, bringing the federal funds rate target range to 3.75% to 4.00%. Chair Powell’s comments leaned hawkish, describing the cut as a “risk management” move. Notably, he emphasized that there were “strongly differing” views regarding how the Committee should proceed in December, and that the meeting is “far from” a foregone conclusion. Investors adjusted their expectations of another rate hike occurring in December down in response.
  (GTMA P. 29, 30, 31)
• China’s economic data for October saw the release of 3Q25 GDP figures, with growth weaker at 4.8% year-over-year. Monthly consumption and fixed asset investment remained on declining trajectories, mainly due to shaky confidence in the private sector. From the 4th plenum, a communique revealed policy priorities for the 15th Five-Year Plan. It re-emphasized high-quality development, prioritizing self-sufficiency and dominance in advanced technologies. Trade tensions between the U.S. and China shifted back and forth, eventually resulting in what appears to be a better-than-expected deal between the two economies.
  (GTMA P. 4, 10, 11)
• The BoJ kept policy rates unchanged at 0.50%. Despite recent government and policy changes, the BoJ’s quarterly outlook report offered limited insights on any changes to their stance. With minimal tweaks to the economic assessment and the new forecasts, guidance was maintained for a hiking path ahead, without hints at any timeframe. The ECB held rates steady, as was widely expected, to keep the deposit rate at 2%. Lagarde’s comments regarding the decision were similar to those at prior meetings. She reiterated that policy was in a “good place” and said that some downside risks to growth had receded.
  (GTMA P. 18, 19)

Equities

• Global equity markets were positive in October, with the MSCI AC World index returning 2.2% in U.S. dollar (USD) terms. Most indices gained, with the MSCI EM index up 4.1%. MSCI China was an outlier, with by far the worst performance at a negative 3.9%. A sudden renewal of U.S.–China trade tensions, with China rolling out rare earth export restrictions and the U.S. threatening a 100% tariff on Chinese goods, jolted the market. Although a de-escalation occurred near the very end of the month, the events still shook markets.
  (GTMA P. 33, 34)
• In the U.S., the S&P 500 was up with a 2.3% return, once again reaching new record highs in October, driven by positive earnings reports and benign inflation numbers. The NASDAQ was up 4.7% over the month.

Fixed income

• U.S. Treasury yields (UST) were firmer over the month, with the 10-year yield down 6 bps and 2-year yields roughly flat, as markets continued to price in more easing from the Fed, temporary concerns over the credit market, and the end of the quantitative tightening program, before paring back on Powell’s note that December is far from a foregone decision at the October FOMC meeting.
  (GTMA P. 57, 58, 62)
• Spreads on both investment grade and high yield bonds widened modestly as negative sentiment weighed on credits, before concerns were dismissed and spreads regained on a string of solid earnings results, with global investment grade and high yield bonds returning -0.1% and 0.7% in USD total return terms, respectively.
  (GTMA P. 64, 65, 66)

Other financial assets

• Oil prices dropped, with the WTI down around 4% and Brent down almost 2%. OPEC+ oversupply drove the initial drop, although prices did recover slightly on new sanctions on Russian oil and an improvement in U.S.-China trade relations. Gold continued to attract investor interest, breaking above USD 4,000/oz on safe-haven demand and central bank buying.
  (GTMA P. 76, 77, 78)
• The U.S. dollar DXY index gained 2.1% in October, as Chair Powell’s comments dialed back market expectations for a December rate cut. The Japanese yen was the weakest G10 currency, which fell 4.1% against the USD, as the BoJ skipped an October hike and offered limited forward guidance. Most other Asian currencies were also slightly lower over the month.
  (GTMA P. 73, 74, 75)

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