Note: Any reference to portfolio positioning relates to our flagship core discretionary portfolios. Clients with bespoke or advisory portfolios should consult their Client Advisor for their latest positioning.
What you need to know
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A widening budget deficit and rising debt levels in the US pose a risk to US Treasuries. Therefore, we’ve decided to further reduce our US Treasury exposure and reallocate part of the proceeds to Japanese government bonds and part to US equities.
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The Bank of Japan looks set to raise rates as inflation has continued to rise, which we believe would lead to the yen appreciating against the dollar, supporting returns in Japanese government bonds when converted into euros and sterling.
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Despite the risk to US Treasuries, US fiscal policy is more positive for US equities, given the economic stimulus it should provide. Furthermore, greater clarity on tariffs and trade deals could support US equities in the near term, which have disproportionately suffered when trade uncertainty was at its highest level. This is why we are reducing our tactical US equity underweight position.
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We think the US dollar is likely to continue to weaken. Therefore, to protect euro and sterling portfolios, the US equities we’re buying are ‘hedged’. They strip out the currency effect and, therefore, aren’t impacted by a weakening dollar. We’re also switching out some of our existing unhedged US equities with hedged versions. This further reduces our dollar exposure.
Daniele Antonucci
Daniele Antonucci
Daniele Antonucci is a managing director, co-head of investment and chief investment officer at Quintet Private Bank. Based in Luxembourg, he jointly chairs the investment committee, owning decision-making and performance outcomes. As head of research, Daniele oversees the investment strategy feeding into portfolios and the teams of specialists across asset classes and solutions, ranging from macro, fixed income and equities to funds, alternatives, and structured products and derivatives. He leads the network of chief strategists, communicating the house view on the economy and markets to financial advisors, clients and the media.
Prior to joining Quintet in 2020 as chief economist and macro strategist, Daniele served as chief euro area economist at Morgan Stanley in London. He completed the High Performance Leadership Programme at Saïd Business School, University of Oxford, holds a master’s degree in economics from Duke University and graduated from the Sapienza University of Rome. Featured in The Economist and Financial Times and often quoted in the generalist press, he’s a published author in finance and economics journals and investment magazines, a frequent speaker on CNBC and Bloomberg TV, and an ECB Shadow Council member.
US fiscal imbalances: a key market focus
Concerns about the US debt and deficit persist. Let’s unpack how President Trump is financing his “big, beautiful bill”. Instead of increasing taxes to fund spending, the bill raises the US debt ceiling, allowing the government to borrow more by issuing Treasury securities. This increase in the supply of Treasuries raises yields, putting downward pressure on prices. As such, US Treasuries, which have traditionally served as a portfolio shock absorber, have become a source of risk.
Such an increase in the US government deficit and debt levels raises interest expenditure and, therefore, debt-service costs and is likely to weigh on the US dollar. Therefore, we believe that the US dollar will continue to depreciate further relative to the other major currencies, presenting another headwind for foreign holders of US Treasuries such as eurozone and UK investors, who need to pay to ‘hedge’ the currency effect.
On the plus side, the US labour market remains resilient. Even though economic growth is slowing, near-term recession risks appear relatively limited in the absence of a full-blown ‘trade war’. This resilience, combined with increased government spending, lower taxes and our expectation of deregulation across several industries, remains supportive for equities, which also continue to benefit from long-term growth drivers such as AI-driven innovation.
Playing dollar weakness and reducing US Treasury exposure
Given this backdrop, the Investment Committee and I have decided to further reduce our exposure to US Treasuries. We think the high level of government debt to begin with and the increase in interest costs following the latest US budget are likely to disincentivise investors, particularly foreign ones, from holding more US government debt. Therefore, as there’s a risk that yields stay elevated or even rise further, we think a reduced exposure is warranted.
We’re using a portion of the proceeds from the sale of US Treasuries to buy US equities. The economic stimulus from US government spending, along with lower taxes and the deregulation we expect, should be supportive of the asset class. Furthermore, more clarity on US trade policy (which country gets what tariff) might be beneficial for US equities. Rising trade uncertainty in the first quarter of this year disproportionately impacted them, so more clarity now should benefit them. After all, it’s tariffs to the rest of the world that are mostly rising, not to the US. That said, we remain slightly underweight, as US valuations are still on the demanding side.
In parallel, we’re switching some of our US equity allocation from ‘unhedged’ to ‘hedged’. This removes the effect of changes in the US dollar and reduces our dollar exposure. This is because the US dollar weakness we expect is likely to be a drag on performance when translated into euros or sterling. For example, while US equities have recovered from their lows in April and are up about 6.5% in US dollars, the dollar has weakened so much that they’re down 5.7% in euros and 1.4% in sterling.
We’re reallocating the remaining cash from our US Treasury reduction into Japanese government bonds, increasing our fixed-income diversification. Japan started normalising interest rates last year after nearly a decade of negative rates. Rates are currently at 0.5% and we expect one more hike before the end of the year. This means the yen is no longer depreciating, which is supportive of Japanese government bonds. The moderate appreciation of the yen we project also provides a beneficial exchange rate effect for euro- and sterling-based investors.
Portfolio positioning recap: sticking with global diversification
Our long-term, strategic asset allocation remains highly diversified across asset classes and regions. Tactically, we retain overweight positions in European, Japanese and emerging market equities. In sterling portfolios, we’re overweight UK equities, too.
We continue to hold low volatility developed market equities, as these tend to outperform during bouts of volatility, reducing overall portfolio volatility should uncertainty rise again. Our position in a US equal-weight index remains in place, reducing concentration risk in mega-cap technology stocks. Where permitted by client knowledge and experience, and investment guidelines and regulations, such as in our flagship core discretionary funds, we also maintain a US equity ‘insurance’ instrument, designed to appreciate if US equity markets fall. While this could change quickly as events unfold, for now we’ve made an active decision not to rebalance portfolios toward their long-term risk and return goals. As a result, given the sell-off in equities and the rally in government bonds, our short-term stance has become more defensive, with less of the former and more of the latter, with a lower level of risk. Of course, the situation remains very fluid and positioning could change rapidly as catalysts such as trade retaliation or negotiation, or policy stimulus, materialise. Our tight risk management process will continue to provide a key input into when and how to add or reduce risk.
Turning to fixed income and commodities, defensive positions in short-dated European government bonds, or gilts in sterling portfolios, continue to play an important role. These allocations help mitigate downside risks in the event that economic data underperform expectations, for example if negotiating trade deals ends up taking longer than initially envisaged. In corporate credit, we’re overweight high-quality European investment grade bonds, issued by companies with solid balance sheets, which we prefer to their US counterparts. Finally, the broader geopolitical fragmentation we observe, with emerging markets seeking alternatives to the dollar-centric system, could also provide further support to our overweight position in gold.
What to expect from the summer on the trade tariff front
Summer is often seen as a time to disconnect, with many stepping back from day-to-day work demands. Yet, even as trading volumes decline and liquidity thins, markets continue to move. Beneath the surface, policy shifts, fiscal trends and geopolitical developments continue to unfold, shaping the economic and corporate landscape and requiring a proactive investment strategy.
One such development is the delay of US tariff hikes to 1 August from the initially planned 9 July date. President Trump has also sent letters outlining the impending tariffs to several countries. The deadline postponement and his suggestion that the 1 August date could still be flexible count as modestly good news. However, taken at face value, the threatened tariff hikes on imports from the European Union (EU), Japan and South Korea, Canada and Mexico, and the hike in copper tariffs, can’t be ignored.
This postponement opens a window for further negotiations. Throughout this year, we have based our key calls on the assumption that, in the end, the US would prefer to strike trade deals rather than damage both its own and the global economy through ever-escalating tariffs. Our base case remains that while the US will implement some tariffs, the latest announcements are a ‘negotiation tactic’ to settle higher than prior to the start of the trade tensions but lower than the announced tariff levels.
Regarding the US-EU talks, we expect the US to secure a base tariff of 10% plus some sectoral tariffs, while also obtaining a commitment from the EU to increase US imports in return for not levying higher and more disruptive duties. EU retaliation against such US protectionism would remain limited, more for ‘show’ with import duties on some iconic products rather than substantive measures. Similarly, we also expect a broad framework agreement with China, though with tensions resurfacing from time to time. Plus, we anticipate additional trade deals with countries such as India, while we think Japan and Korea, and Canada and Mexico, are likely to make further concessions to the US, possibly resulting in lower tariffs.
If you have any questions about our latest market views or portfolios, please speak to your Client Advisor who will be happy to help.
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Information correct as of 14 July 2025.
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