The Big Picture: When uncertainty prevails – stay invested, be flexible
Trump’s ‘Liberation Day’ sent shockwaves across financial markets. Since then, trade tensions between the US and China have eased somewhat. Still, US tariff policies remain surrounded by uncertainty. As a result, investing in the second half of 2025 requires flexibility.
On 2 April, referred to by Trump as ‘Liberation Day,’ unexpectedly high import tariffs were announced. Consequently, equity markets nosedived and bond yields increased, leading Trump to delay the highest tariffs for most countries and offer a 90-day negotiation period. Most countries currently face a 10% tariff, but higher tariffs may be imposed in July when the 90-day ‘pause’ ends.
Uncertainty is already causing damage
It is uncertain how many countries will be able to remove the threat of increased tariffs by securing trade deals with the US. The longer the uncertainty persists, the more damaging it is to the economy. Consumers become more cautious in their spending, companies postpone investment decisions and world trade declines. Meanwhile, the import tariffs that are already in effect have a negative impact on growth.
The US-UK trade deal reached in May is a positive sign and might serve as a template for a future deal between the US and the EU. That said, the US-UK trade deal implied that the UK accepted the 10% tariff. As such, US trade barriers are much higher now than they were a couple of months ago. Something similar can be said about the recent de-escalation of the US-China trade war. In May, a temporary reduction in tariffs between the US and China was announced. Still, both the China and the overall tariff rates are much higher than they were at the start of the year, which continues to exert negative pressure on especially the US economy.
US feels pain on multiple fronts
We do not foresee a recession in the US. However, we have lowered our US growth forecasts, both for this year and the next, as we expect growth to slow to a below-trend level. A specific consequence of the import tariffs is rising prices: US companies that import goods will – partially or fully – pass on the higher tariff costs to their customers. In other words: higher inflation. This is bad news for American consumers and poses a dilemma for the Federal Reserve.
But it’s not just the growth of the US economy that is suffering under Trump’s policies. The US’s reputation as a reliable trading partner and ally has also taken a hit. You can read more about the role of the US as a ‘safe haven’ for investors in the article ‘Challenges.’
Europe: slower growth in the short term
In Europe, the economic shock of the import tariffs will also be felt in the second half of this year. In our base case scenario, we assume that the eurozone economy will avoid a recession. But growth will likely decline in the coming quarters, to a level below trend. In 2026, we expect growth to accelerate again, partly due to significantly higher fiscal expenditures, such as government investments in infrastructure in Germany. Higher defence spending should also boost growth in Europe. (Do you want to know more about investing in defence? Read the article ‘Disruptors’ about the role of technology in modern defence.)
What will central banks do?
Although Trump would love to see lower interest rates, the Fed is unlikely to lower its policy rates anytime soon. This has everything to do with Trump’s own policy, as his import tariffs contribute to higher inflation. The European Central Bank (ECB) has more room to cut interest rates, as inflation expectations in the eurozone are low. (See the chart below.) We therefore expect the ECB to continue with rate cuts in the second half of this year. This will benefit economic growth in Europe
Uncertainty requires flexibility from investors
We have had turbulent months behind us. And we expect uncertainty to prevail in the second half of 2025. For you as an investor, it is therefore important to be able to respond flexibly to changing circumstances. To that end, we have freed up cash by selling some bonds in the weeks following ‘Liberation Day.’ That said, we remain slightly overweight in this asset class overall. As we expect the ECB to move forward with its rate cuts in the coming months, we believe European government bonds continue to be an attractive investment.
Recently, we also reduced our equity weighting (to neutral), considering the possibility of growing recession fears in markets once the adverse impact of import tariffs becomes more tangible. Looking ahead to the remainder of 2025, we expect major equity indices to be largely trading within a range. If markets were to experience another growth scare, a more negative scenario could unfold. Conversely, if the Trump administration reversed its tariff policy by reaching agreements with major trading partners, the picture would become much friendlier for equities.
Proceeds of our shift to a neutral equity positioning were added to cash as well. Holding a bit more cash now provides you, as an investor, with the flexibility to capitalize on opportunities as they arise. We believe an investment in gold, which we have added to our portfolio in May, to be one of those opportunities.
Where do we see further opportunities? And when is the time right to act on them? Read more in the article ‘Opportunities.’
