In uncertain times, focusing on flexibility is key

Recent weeks have witnessed a significant level of market volatility in both directions, driven by uncertainties in trade, fiscal and immigration policies. The market may have been expecting some turbulence, but the extent of it took almost everyone by surprise. This volatility, however, could present opportunities for active investors, and we believe an unconstrained approach could be well suited to navigating this challenging environment.

Markets were particularly focused on President Trump’s ‘Liberation Day’ at the start of April, announcing steep increases to tariffs on the US’s trading partners. However, this stance has since been moderated, albeit there have also been concerns about central bank independence, with President Trump expressing his dissatisfaction with US Federal Reserve Chair Jerome Powell. 

Investors have reacted by selling US assets, challenging the previous consensus position that US was in an exceptional economic position. Returns on both US government and corporate debt underperformed other developed markets during April – particularly longer-dated US government bond yields, which rose sharply[1]. 

With the US Economic Policy Uncertainty Index now at its highest level for more years, we believe no investor should be attempting to predict the path of US policy. Instead, it’s wise to prepare for a wide range of outcomes by looking for signposts to guide us down the many potential ways forward. Despite all the volatility, our key marker points have not changed since the beginning of the year – the health of US employment, the scale of fiscal largesse globally, and the strength of investor demand for fixed income.

An end to secular stagnation?

Our central investment thesis since the pandemic has been that a seismic shift from monetary policy to fiscal policy has taken place across the globe. Governments that are currently sitting on large deficits will need to focus on growth – austerity is not an option. Germany has already capitulated on its previous fiscal constraints. 

In the US, this is truer now than ever, as we believe the new administration could look to even higher fiscal spending to offset some of the economic hits from the tariff proposals. Higher fiscal spending could result in better growth as well as higher inflationary outcomes, which means we remain cautious on duration risk.

Follow the flows…

Investor demand for fixed income has been strong over the past few years as yields have become attractive in our view, following the rate-hiking cycle across most developed markets. Despite some market outflows during April, demand for fixed income has returned as markets have bounced back. Some of the market outflows have been concentrated in shorter maturity assets, which we think could present some interesting opportunities for nimble investors. 

We have also seen sustained demand for longer-duration US investment grade credit, from both domestic pension funds and international buyers. Meanwhile, Asian demand for higher yielding assets has also remained robust. 

A murky outlook

As the investment ‘looking glass’ for 2025 is unusually murky, we believe it is now more important than ever to maintain a wide range of investments across fixed income asset classes and to adapt quickly as market dynamics change and develop. The key to success lies in the ability to cut through the noise coming out of the US administration and focus on what matters most over the longer term. This is why we believe a thoughtful but nimble approach is required in order to balance opportunity-seeking and risk-taking.

 

The value of an investment and any income taken from it is not guaranteed and can go down as well as up, and the investor may get back less than the original amount invested. Assumptions, opinions, and estimates are provided for illustrative purposes only. There is no guarantee that any forecasts made will come to pass.

 
[1] Source: Bloomberg as at 15 May 2025.