Craig Rippe, Head of Multi-Asset, considers the impact of the new US protectionism on the global economy and looks at the risks and potential opportunities for markets.
Global markets entered 2025 on edge, rattled by a new wave of US protectionism.
President Trump’s April tariffs – which he dubbed ‘Liberation Day’ – liberated investors from over seven trillion dollars. Equities are now pricing in retaliation risks and a rising chance of a US recession. US equities had their worst quarter since 2022. North American equities fell over 7% as fears of stagflation grew. Tariff-driven inflation, weaker demand and slowing job growth hit investor confidence hard. A key manufacturing index slipped into contraction territory.
The UK economy delivered a surprise boost early in the year. February GDP rose 0.5%, with help from services, manufacturing, and construction. But inflation – pushed up by energy costs –kept the Bank of England from cutting rates. Base rate remained at 4.75%. Government forecasts now project just 1% growth for the rest of 2025. Despite budget cuts, UK markets stayed calm, with bond yields and equities unchanged.
European equities saw a strong quarter, fuelled by defence spending and investor optimism. They climbed 8%, led by defence stocks that were up 70%. As the Germany ramps up military spending to cover shrinking US support, investors are backing European defence firms over US suppliers. The European Central Bank cut its deposit rate to 2.5% to support growth.
Meanwhile, China made major strides in tech and green energy. The launch of DeepSeek’s new and cheap artificial intelligence model lifted Chinese tech shares, shifting the balance in the global AI race. Meanwhile, electric car makers such as BYD posted strong sales.
Navigating a Shifting Landscape
Investors face a fragile and unpredictable environment. Equities are volatile, worsened by the new protectionist US trade stance. Treasury yields have swung as investors brace for more tariffs – now possibly extending to semiconductors and pharmaceuticals. Inflation remains high, and growth is slowing.
US equity positioning is becoming more important. President-led changes are driving a new world paradigm. The US global security policy change has many impacts, some profound. The US is presenting itself as a less predictable, internally-focussed partner. The tech sector – itself a key security issue and a substantial weight in the equity market – is also in the middle of a cash-intensive growth phase. This is creating much valuation uncertainty. Calls for the end of the dollar as the world’s reserve currency are premature, but they are increasing volatility too.
A potential US recession remains a big threat. Global demand would fall in response, pulling down economies tied to American consumption. Synchronised slowdowns could follow in Europe and parts of Asia.
Nevertheless, Europe is pivoting toward stimulus. Germany announced a €500bn infrastructure plan, constructed in a way to sidestep its constitutional debt brake. In addition, it approved an unconstrained military spending plan. Combined, these could jumpstart wider EU spending. This shift may help offset weak global demand and support regional growth.
In our view, China still offers opportunity in selective sectors. Tech and green energy remain bright spots despite external pressure. These sectors present options for growth investors looking to hedge against trade disruption. Balance is key. However, although China offers cheap exposure to fast-growing technology companies it has yet to resolve rapidly growing tensions with the US. It is unclear how far the US President wishes to push this agenda, nor how much authority he will continue to have in going to the extremes he favours.
Despite the new protectionist-induced volatility in equities and currencies, the US equity market remains the deepest and most stable pool of equities globally. The dollar remains the only reserve currency of choice for most nations. However, European equities – especially beneficiaries of new German spending – are cheaper than those in the US, and opportunities are presenting themselves.
Within fixed income, continued longer-term inflation risks persist and make shorter duration portfolios more attractive.
Important information
The value of investments may fall as well as rise and investors may not get back the amount invested.
The views expressed in this document are those of the fund manager at the time of publication and should not be taken as advice, a forecast or a recommendation to buy or sell securities. These views are subject to change at any time without notice.