Preparing for a volatile, but profitable summer

2025 has, thus far, been a very profitable year for global investors. Global equity markets are making new record highs and US bond yields have remained well-contained, despite US trade uncertainty, an escalation of geopolitical risks and concerns about the US budget deficit.

We expect the second half of the year to see a similar mix of volatility, with ultimately stronger markets, along with a weak US Dollar narrative. Trump’s tariff pause expires in early July and reports argue that while negotiations with many trade partners are at relatively advanced stages, they remain maddeningly short of a conclusion. While we expect the US to extend the deadline if it aids concluding a deal in the next few weeks, some nervousness and temporary volatility in markets remains possible.

Investors should be prepared to take advantage of any such window provided by volatile markets to add exposure to our preferred H2 2025 themes.

Our H2 2025 investment themes

For the second half of 2025, we focus on the following three main themes: (i) Overweight global equities, with a tilt towards Asia ex-Japan (ii) a weak USD, favouring emerging markets (EM) local currency bonds, and (iii) portfolio diversifiers, led by gold and alternative strategies.

We would view any market jitters around the upcoming expiry of Trump’s trade truce as consistent with our weak USD view, and an opportunity to add to our H2 investment themes. Our expectation for a weak USD favours a globally diversified equity exposure, with an Overweight to Asia ex-Japan, especially given bullish signals across our quantitative models for major markets such as the US. We would add to USD-denominated bonds on pullbacks if the US 10-year government bond yield goes above 4.5%. We would also add to EM local currency bonds as bullish one-sided investor positioning eases.

Learning from volatility

One might be forgiven for perceiving 2025 thus far as a year to lurch from one crisis to another. However, the lesson we would draw is that the crises have not proven to be a lasting deterrent for financial markets. In fact, global equities rose over 10% in Q2. This occurred despite the US ‘Liberation Day’-led sell-off and, more recently, geopolitical events in the Middle East which resulted in only temporarily higher oil prices.

We would continue to ease into equities and other preferred assets, especially on any tariff-related volatility.

Diversifying equity exposure, favouring Asia

Our quantitative models remain bullish in favour of Japanese and UK equities, in addition to US markets, supporting the case that major equity markets are set to make new highs. Recent breaks higher in major benchmark indices in both the US and Asia are testament to this support. While it is tempting to conclude that this backdrop implies ‘more of the same’ for US equities, we expect today’s backdrop to result in continued pressure on the USD. This is why we now favour more diversified global equity exposure, rather than a US-focused allocation.

We would use any volatility to add to Asia ex-Japan equities, where we are Overweight versus benchmark in global equity allocation. We expect the gains in Asia to be led by China, where we see limited risk of any escalation in trade tensions after the recent agreement with the US. In Europe, fiscal expansion, including the recent NATO members’ almost-consensus commitment to spending 5% of GDP on defence, will support our core holding view on Euro area equities and our preference for the region’s industrial sector. In Japan, a BoJ pause on rate hikes supports our core holding view.

Add to USD and Emerging Market bonds on pullbacks

Fed Chair Powell showed little urgency to cut rates until uncertainty over inflation – driven by uncertainty over tariffs – abates. However, US bond yields have drifted lower as economic data disappointed and other Fed governors revived the prospect of a rate hike as early as July if job market data slows further.

In USD bonds, we would await a rebound in the US 10-year government bond yield above 4.5% before adding further. We continue to favour the 5-7-year maturity profile in US bonds because we see this offering the best balance between maintaining exposure to falling yields (rising bond prices) without taking the excessive risk inherent in very long maturity bonds. We also remain opportunistically bullish on US inflation-protected bonds to help mitigate any volatility caused by any near-term rise in inflation.

Among non-USD bonds, we would add to EM local currency bonds on any pullbacks in the coming weeks, once excessively bullish investor positioning moderates.