As we reach the midpoint of 2025, the change we’ve witnessed since the start of the year is staggering and has translated into a high level of market volatility. We are in the middle of a fundamental restructuring of the geopolitical order that we’ve known since the end of World War II – politically, militarily and economically.
It’s become much harder to determine where to invest, over what period and what types of returns to expect. However, volatility presents opportunity for fundamental, bottom-up investors. It’s our job to identify compelling investment themes in any market environment. Here and in our Midyear Outlook report, we offer you an overview of those opportunities as we see them.
Economic outlook: Higher uncertainty, lower growth
There are many ways to describe the outlook for the US and world economies. But at the midpoint of 2025, one word has risen to the top: uncertainty.
Uncertainty over US trade policy – with rising tariffs at the centre of the storm – has delivered a severe shock to the global economy. For the first time since 2022, US gross domestic product declined in the first quarter.
As policy uncertainty rises, global economic growth projections are falling. Downward revisions already have been issued for the US, Europe, Japan and many emerging markets, based on the latest figures from the International Monetary Fund. Recent limited trade deals involving the US, UK and China are encouraging but much remains to be done.
Equity outlook: World in transition opens opportunities
As the US steps back from unfettered free trade, Japan and Europe are responding accordingly.
Entering 2025, Japan’s average tariff rate was among the world’s lowest, highlighting the potential for productive negotiations amid escalating trade war fears.
Japan has a strong track record of negotiating trade agreements. In recent years, it has signed multiple economic partnership and free trade agreements, with blocs including the European Union and several Asia Pacific nations. More than 87% of Japan’s trade is now with countries where it either has in place or is negotiating an EPA or FTA.
In Europe, governments have taken bold steps to strengthen their collective security and economic capacity.
Germany relaxed its fiscal rules and unveiled a €1 trillion stimulus package, which could trigger a stronger industrial cycle. The increase in spending could provide a boost for defence, building materials and infrastructure companies over the next several years.
Meanwhile in the near-term, markets tend to overreact to volatility, but this dynamic can present long-term opportunity for patient investors.
In 2020, stocks across a range of industries suffered double-digit losses in the pandemic-induced bear market. “With travel and leisure activities halted, cruise lines like Royal Caribbean were priced as if no one would ever book passage again,” recalls equity portfolio manager Chris Buchbinder. “This turned out be an excellent investment opportunity for those who recognised that global travel would one day bounce back.”
Such turnarounds don’t come along every day of course. The key when great companies go on sale is you have to be prepared to weather some anxiety near term. Not all companies will have such powerful recoveries, which is why fundamental research is essential.
Bond outlook: Income potential and protection from stock swings
Despite the stock market swoon in April, it was the bond market selloff that caused the pause on President Trump’s tariffs. Other than the brief disruption, US Treasury markets have been orderly with interest rates rising.
Yields on the 10-year Treasury reached 4.39% as of 17 June 2025. The upward march came even as yields on shorter dated Treasuries declined, steepening the yield curve.
Expectations of a persistent US federal budget deficit amid potential tax cuts and other spending plans also play a role in keeping long-term yields high. There is room for the curve to further steepen in several scenarios.
The most extreme steepening has been in Japanese Government Bonds. The sell-off is being driven by concerns about increased supply at a time of weaker demand as the Bank of Japan (BoJ) is buying fewer long dated bonds as part of its quantitative tightening plan. We think the dislocation temporary and anticipate the BoJ will now pause hiking rates and potentially take measures to address the supply demand imbalance.
A diversified portfolio of bonds has provided relative stability during the policy-induced stock market volatility. When the S&P 500 Index fell 18.7% from a record high on 19 February 2025 to a low on 8 April 2025, the Bloomberg U.S. Aggregate Index gained 1%. The return of this time-honored relationship, which disappeared in 2022 during the Fed’s rate-hiking cycle, is crucial as Trump’s policy initiatives raise the risk of a recession.
