Mid-Year Outlook 2025

We are currently facing a more contentious geopolitical landscape, with the US administration contributing to rising tensions through tariffs and scaling back commitments to European security. This may further unite Europe, as leaders recognize the advantages of collective negotiation while pursuing new trade agreements to diversify their trading partners. The US–China relationship is expected to worsen, although both countries will likely aim to avoid escalation. In this context, the trend of diversifying away from US assets is expected to persist, with a particular preference for European assets.

Despite the subdued growth outlook, we do not expect an earnings recession, as businesses continue to show resilience. This, combined with the Fed’s anticipated rate cuts, supports a cautiously optimistic asset allocation with a focus on inflation protection. We favour global equities with a focus on valuations and pricing power, alongside commodities, gold, and hedges against growth and inflation risks stemming from a geopolitically uncertain world. Infrastructure investments offer the potential for stable cash flows, while currency diversification will be crucial amid shifting correlations between the USD, equities, and bonds.

Investors will require a higher premium for US Treasuries amid uncertainty over trade policies, rising public debt, and a substantial bond supply. In developed markets, long-term yields are expected to remain under pressure. Central banks cutting rates will continue to support short-dated bonds, contributing to a steeper yield curve. Investors will seek diversification across markets, favouring European and emerging market debt. We recommend maintaining exposure to quality credit, with a preference for euro-denominated investment grade, particularly financial and subordinated credit.

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Equities may deliver low single-digit returns in the second half of the year, with ongoing rotations expected. Europe’s appeal is likely to become a structural theme, benefiting small- and mid-cap stocks, where valuations remain highly attractive. Globally, sector selection will be key. We favour domestic and service-oriented sectors to mitigate tariff risks, focusing on themes such as US deregulation, European defence and infrastructure, and the ongoing reforms at the Tokyo Stock Exchange, which are fostering a more investor-friendly environment in Japan.

Emerging market equities will be favoured in H2 2025, supported by recovering macroeconomic momentum and stabilizing inflation. As US exceptionalism wanes, India and ASEAN are emerging as key beneficiaries of global supply chain rerouting. India’s “Make in India” initiative is attracting multinational corporations, especially in defence and IT. With a focus on domestically oriented sectors, these markets are not only manufacturing hubs but also dynamic growth engines, well-positioned to capitalize on structural shifts and expanding consumer bases.

Extra selectivity is essential given the surge of capital flowing into these segments. Overall, a challenging geo-economic environment will enhance the case for diversification* through private assets, benefiting resilient domestic opportunities. Private debt and infrastructure are expected to remain the most attractive areas. Private debt may gain from robust direct lending and fundraising activity, while infrastructure will continue to appeal to investors seeking inflation protection.