This note contains an overview of our market views, what we are watching, and our portfolio strategy. Any reference to portfolio positioning relates to our Flagship Solution. Clients with bespoke discretionary or advisory portfolios should consult their Client Advisor for the latest update on your portfolio.
We expected the US economy to slow down in 2025, given its previous high levels, and while that slowdown is occurring, it is happening with more volatility than anticipated. The elevated uncertainty is weighing on business, consumer and investor sentiment. While not all of Trump’s policies have become law, the US environment is far less predictable. The ongoing unpredictability could delay hiring, investment and spending—at least until tax cuts and deregulation come.
Right now, markets are focusing on key economic data, some of which have deteriorated due to policy uncertainty. Some investors fear a recession. Our calculations suggest that the US equity market is now assigning a one-third probability of recession within a year.
However, key US economic indicators such as the labour market and forward-looking surveys remain well above recessionary levels. But given the risks—policy uncertainty, high valuations and concentration in certain sectors such as technology—we have reduced our US equity exposure and reallocated to European equities (including the UK in sterling portfolios), given that we think extra fiscal spending to finance defence, infrastructure and economic reform in Europe as a whole, and Germany in particular, is market-positive (see below).
However, we still hold a US equal-weighted equity index for diversification. This approach favours sectors that could benefit from Trump’s policies such as trade protection, fiscal stimulus and deregulation, like industrials and financials. So, while we’ve reduced exposure, we remain slightly overweight in US equities.
We’re also diversified across asset classes and regions. We hold inflation-protected bonds, gold and broad commodities to mitigate the impact of various risks on portfolios. To manage volatility, we use equity ‘insurance’ instruments that gain value when the market declines (where client knowledge and experience, and regulations and investor guidelines, permit). These worked well in the US, allowing us to lock in some profits on this specific position and partially offset the impact on declining US equities. We also continue to hold European equity protection, though it will expire later this month.
We’ll readjust portfolios as required and maintain a globally diversified approach to portfolio construction to mitigate the impact of local issues while staying invested for the long term. Market volatility tends to ebb and flow as economic, corporate and (geo)political events unfold continuously. Rather than knee-jerk reactions, we seek to maintain composure, anticipating potential developments.
On Friday, the incoming coalition agreed with the Greens that about €100 billion out of the €500 billion infrastructure fund—now for 12 years—have to be invested in climate protection. Based on this, the Greens plan to vote in favour of the fiscal package. If approved on Tuesday, the Bundesrat must also pass it next Friday with a two-thirds majority. We believe this is likely.
If the package fails, the Great Coalition may try again in the new Bundestag, seeking support from the far-left party. That would lead to more negotiations and uncertainty, but it still has a good chance of passing.
With Germany’s fiscal package and stronger EU cooperation on growth and defence, we’ve increased our exposure to European equities to a tactical overweight. Stronger corporate earnings, attractive valuations and broader economic optimism support this move. We have not focused solely on defence stocks; instead, we are opting for a broader exposure. Defence and fiscal spending will benefit various industries, such as industrials, financials, IT, healthcare, utilities and energy. As part of our strategy, we want to keep a degree of diversification and not be overly exposed to only one narrow sector. Valuations are also already high in the defence sector. On average, European defence stocks have already risen by around 75% in 2025. High demand exists, yet it’s only part of the equation.
In Europe, the focus will be on Germany, where the fiscal package faces critical votes (see above). On Friday, Eurozone consumer confidence data will provide further clues about household sentiment. The Bank of England (BoE) meets on Thursday. There are no rate cuts expected this week, but markets anticipate two cuts later this year. In Asia, the Bank of Japan (BoJ) meets on Wednesday. Policymakers should keep rates unchanged, though markets are pricing in a rate increase later in the year.
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Information correct as of 17 March 2025.
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