In football, when a goalkeeper is in a one-on-one situation with the opponent’s striker, he will come out and stretch his arms and legs to close down as much of the angle as possible to protect his goal. April 2025 was a watershed moment for investors in many ways, both from the perspective of the global economic cycle and potentially the start of a structural shift in the global order. When facing such uncertainties, investors will need to behave like a goalkeeper, be proactive in portfolio allocation and spread it over a broader range of assets and geographies to protect themselves.

The fear of stagflation

Many investors found U.S. President Trump’s tariff plan complex and its objectives confusing. The April 2 announcement imposed a 10% universal tariff on all imports and then an additional “reciprocal tariff,” essentially calculated by each market’s trade deficit with the U.S. Following some sharp equity market reactions and a spike in U.S. Treasury yields, the government announced that these reciprocal tariffs would be postponed for 90 days. Various exemptions have been announced, such as on semiconductors and automobiles. While many trade partners rushed to engage Washington in trade negotiations, China opted to stand firm and retaliated with import duties against U.S. products, as well as export restrictions on rare earths.

The Trump administration seems to be increasingly aware of the economic impact of its tariff policy and is engaging in trade negotiations with trade partners, including Japan, South Korea, and the euro area. However, policy uncertainty remains the biggest challenge for the business sector. In 1Q earnings results, many CEOs have shared their concerns over the potential damage.

For consumers, the prospect of more expensive products, as well as government spending cuts due to efficiency drives, are also dampening sentiment. U.S. consumers may opt to rush to buy now to avoid a higher price tag in the months ahead. Strong spending numbers now could set up for a weaker performance in 2Q and the second half of 2025. This is already translating into downward revisions in corporate earnings for the quarters ahead.

Our calculations put the average tariff rates of U.S. imports of consumer goods from 2.4% before Trump’s inauguration to as high as 22%, based on 2024 imports data. The highest tariff rate in a century means it would be difficult for importers and retailers to fully absorb the import duty increase, and some would be passed on to consumers. The Federal Reserve (Fed) has already warned that inflation could rebound on the back of tariffs.

Hence, we land in an unenviable combination of weaker growth and higher inflation. This puts the Fed in a dilemma with two opposing needs and just one tool. We see the central bank eventually prioritizing growth in its policy calculation. Higher rates would have limited impact on tariff-induced inflation, but lower borrowing costs could help businesses and households ease their burden and maintain spending.

Slower growth is our core scenario for the U.S. in the next 2-3 quarters; however, a recession can still be avoided with the right policy execution. Better policy clarity from the White House, when it comes, can start the confidence healing process. Lower rates and a more expansionary fiscal policy can also help to dampen the blow on weaker corporate investment and consumption.

Changes in global order

Investors’ concerns over the U.S. are not limited to near-term cyclical factors. The current administration is making some changes in both domestic and foreign policy that could impact the international perception of the U.S. To some extent, the weakening of the U.S. dollar (USD), in contrast to higher U.S. Treasury yields, reflects international investors’ questions on these long-term shifts.

The tariff plan is an attempt to reconfigure the global trade system and aims to bring manufacturing back to the U.S., even though it is not realistic to accommodate all manufacturing processes, especially those that are labor-intensive. The concept that trade is a zero-sum game is flawed as the U.S. economy has benefited from exports of high-tech goods, as well as services. A more isolationist ideology could cost growth in both the U.S. and globally.

In addition to tariffs, the U.S. position on how to resolve the Russia-Ukraine conflict has raised concerns among European governments (and the same could be extended to U.S. allies in Asia, such as Japan and South Korea) about the future of the North Atlantic Treaty Organization (NATO) and the need to boost the region’s ability to defend itself, in case the U.S. reduces its support to help defend allies. This would imply more military spending by these allies, as well as a more diversified approach in trade negotiations and foreign policy. For example, Europe may need to reconsider its de-risking strategy with China and take a more balanced approach between the two largest economies in the world.

Domestically, as U.S. President Trump pressures the Fed to cut rates, there are also concerns about the possibility of Fed Chair Jay Powell being removed before his tenure ends in May 2026. Central banks’ independence is crucial in their ability to guide markets and manage public expectations. Political pressure that could affect central banks' credibility, as seen in some emerging markets, might weaken investor confidence and pose risks to financial instability. Therefore, it was reassuring to see U.S. President Trump rule out removing Chair Powell. Investors are also monitoring how the White House interacts with the judiciary, as well as universities.

Countering the pain

Given the disruptions from U.S. trade policy, governments and central banks are doing more to support their economies. The Bank of Japan is likely to push back on rate hikes despite rising inflation. The Japanese government is also coming up with a fiscal package to offset the negative impact of U.S. tariffs, focusing on small and medium enterprises and low-income households.

In its Politburo meeting in late April, China’s senior leadership reiterated the importance of supporting the domestic economy, even though it fell short of announcing specific policies. We expect to see more fiscal support to the sectors impacted by the tariff tensions and more spending plans to boost consumption.

Central banks have also been relaxing monetary policy to provide some buffer to growth. New Zealand, the euro area and the Philippines all lowered their policy rates in April. We expect more to follow in the months ahead.

Covering more bases

Given the downside risk to growth and the potential change in the global economic order, like a good goalkeeper, investors will need to stretch their arms and legs to reach further in order to diversify their portfolio allocation. Income also plays a critical role in providing some return consistency amid heightened asset price volatility. This could come from fixed income, equity dividends, alternative income streams or option premiums.

U.S. policy uncertainties are impacting risk assets, especially in the U.S. However, there are opportunities arising in this environment. Export growth risk in China, Europe and Japan is forcing their central banks and governments to support domestic demand, helping domestically focused companies.

Despite the sharp spike in U.S. Treasury yields in early April, we still see short-duration fixed income as a better option than cash equivalents, such as time deposits. As mentioned above, an economic recession in the U.S. can be avoided with appropriate policies. However, if we are indeed moving toward a recession scenario in the next 2-3 quarters, equities could face more correction pressure with a weaker earnings outlook.

However, once the Fed and government turn to more stimulus, the rebound from the recession typically represents the best period of return for risk assets in a growth cycle. Capital locked up in time deposits would relegate investors to just watching on the sideline as a spectator. Hence, short-duration fixed income would provide the flexibility for investors to rotate when the economic cycle moves from recession to recovery.

Global economy:

• Tariffs took over headlines throughout April, with U.S. President Trump’s announcement of reciprocal tariffs on April 2, sparking worries of stagflation. On April 9, he announced a 90-day pause on reciprocal tariffs, with the 10% baseline tariff remaining in place. Investors reduced growth expectations for the U.S., causing Treasury yields to fall. March’s consumer price index (CPI) eased to 2.4%, lower than expected, but inflation expectations remain high in the near term due to tariff policies. The labor market remains resilient for now. In March, 228,000 jobs were added, higher than expected, although the unemployment rate ticked up from 4.1% in February to 4.2% in March.
  (GTMA P. 28, 29, 30)
• U.S. tariff announcements remain a risk to the European market given its export exposure. The European Central Bank lowered rates by 25 basis points (bps), citing “outlook for growth has deteriorated owing to rising trade tensions.” Eurozone consumer confidence fell by 2.2 points in April and economists revised down growth expectations. However, Germany’s fiscal expansion and overall ramp up in defense spending across the region are expected to partially offset the growth impact from U.S. tariffs.
  (GTMA P. 18, 19, 20, 21)
• China’s 1Q gross domestic product exceeded expectations, growing at 5.4% over the quarter. March exports surged 12.4% year-over-year (y/y) due to front-loading of shipments ahead of U.S. tariffs. Bank lending amounted to RMB 3.64trillion, above expectations, while CPI fell 0.1% y/y in March. U.S. tariff risks loom large given the outsized level of tariffs, essentially implying a trade embargo. Policymakers reiterated their supportive stance in the April Politburo meeting and emphasized the readiness to stimulate the economy but are likely waiting for tariff policy clarity. In Asia, central banks in India, New Zealand and the Philippines lowered policy rates to support the economy.
  (GTMA P. 5, 6, 7, 8)

Equities:

• The MSCI AC World stabilized at 0.8% month-over-month (m/m) in April, after declining 4.1% in March. Developed markets (0.7%) underperformed emerging markets (1.0%). MSCI World was supported by Europe (3.8%) and Japan (5.2%), while MSCI U.S. declined by 0.6%. Year-to-date (YTD), MSCI Europe outperformed major markets with 14% returns, followed by China at 9.4%, while the U.S. is still down 5.4%.
  (GTMA P. 33, 34)
• In the U.S. market, NASDAQ outperformed  with a 0.9% return, compared to -0.8% in S&P 500. Small-caps underperformed with -2.4% returns due to recessionary fears. Equity performance was volatile intra-month, with the S&P 500 falling 12% from April 2 to April 8 due to larger-than-expected tariff announcements. Markets recovered later, with an 8-day winning streak at the end of the month.
• Sector-wise, defensive sectors such as consumer staples and utilities remained resilient with 1.9% and 2.0% returns, respectively. Tech also performed well with a 1.2% return, especially after the temporary tariff relief on select tech imports. However, YTD returns for the sector still stand at -11.4%. Energy underperformed at -12.8% due to lower energy prices.
• Emerging markets rose 1.0% and APAC ex-Japan outperformed at 1.4% in U.S. dollar terms. Within Asia, performance was volatile and uneven. MSCI China fell 4.6% due to unprecedented trade tensions and Taiwan SE Weighted fell 2.2% due to tariff threats on semiconductors. However, Australia, South Korea and most Southeast Asian markets were more resilient.

Fixed income:

• U.S. Treasuries were volatile in April, with the 10-year yield temporarily breaching the 4.50% level on technical factors such as hedge funds deleveraging, in addition to structural shifts in Treasury demand driving a rise in term premium, before settling down to 4.16% at the end of the month. The Japanese government bond 10-year yield fell to 1.31%, as markets turn to assets traditionally considered as safe haven amidst global tariff turmoil.
  (GTMA P. 55)
• Global Aggregate returned 3.05% m/m, with investment grade bonds outperforming high yield bonds given recession worries. Spreads on U.S. investment grade and high yield bonds widened by 12 bps and 37 bps, respectively. Base rates fell to cushion the spread widening, resulting in overall yields falling 1 bps and rising 17 bps, respectively, for the two asset classes.
  (GTMA P. 60)

Other financial assets:

• Commodities were broadly weaker in April, with the DJ/UBS Commodity Index falling 5.1%. Gold was up 6.0%, touching a new record high of 3500/oz before paring some gains. Silver and copper prices fell by 5.4% and 4.5%, respectively. Crude oil prices were down more than 18% amid demand headwinds from tariff worries and higher Organization of the Petroleum Exporting Countries’ (OPEC+) supply. Natural gas fell even more by 20.5%, due to demand concerns and materially higher U.S. gas output in April.
  (GTMA P. 71, 72, 73)
• The USD declined over the month, with the DXY index falling to 99.5 by the end of April, a 9.5% pull-back since its January high. The euro, Japanese yen and Australian dollar all rose in April, up 5.2%, 4.8% and 2.7%, respectively.
  (GTMA P. 69, 70)

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