Aberdeen Investments

The market turbulence and elevated volatility witnessed since President Trump’s inauguration in January appear set to define 2025.

The Trump administration’s disruptive approach to global geopolitics and trade relations may prove far more damaging than markets currently price in, posing headwinds to global economic and market stability. However, certain policy initiatives could paradoxically foster growth-supportive and market-friendly conditions. Meanwhile, stretched US equity valuations present additional risks.

Potential for mutually beneficial China-US agreement

For China, the outlook remains mixed. While US tariff impositions on Chinese imports remain probable, the significant spillover effects on the US economy suggest room for a negotiated settlement – particularly given President Trump’s transactional approach during his prior term. Regardless, to counter this tariff risk, China has taken and will likely intensify stimulus measures to accelerate domestic growth and put the economy back on track.

In this context, investors may consider strategies that balance growth opportunities with fixed income solutions to hedge against uncertainty. 

Higher rates for longer

Fixed income markets currently present intriguing dynamics. Expectations now point to the Fed concluding its rate-cutting cycle at a higher terminal rate than previously anticipated, driven by US election outcomes and anticipated fiscal/trade policies under Trump’s second term. These measures could stoke near-term domestic inflation, compelling the Fed to maintain a more hawkish stance. This scenario implies an extended period of elevated rates, creating headwinds for long-duration bonds.

That said, a flattening yield curve has compressed the spread between short- and long-term bond yields. This allows investors to capture competitive yields via shorter-duration bonds (1-3 year maturities) while mitigating rate risk, by forming portfolios with 1-2 year effective durations.

Globalising short dated bond strategy

To navigate different phases of investment cycles, whether in low-yield or high-yield environments, investors would be better positioned by strategically allocating to global opportunities—including emerging markets and Asian credits—while balancing exposure to developed markets. Diversifying across different markets to calibrate duration profiles, credit ratings, and fundamental credit quality provides a higher probability of achieving attractive yields and growth potential compared to developed-market-only strategies, while helping investors generate stable monthly income streams.

In conclusion, against a backdrop of constructive risk sentiment and stronger potential growth drivers, we maintain a constructive outlook on investment-grade corporate bonds. The compelling combination of their aggregate yield attractiveness and balanced return prospects across upside/downside scenarios reinforces our conviction. 

A strategically constructed portfolio combining shorter duration, global diversification and high-quality holdings delivers defensive positioning with resilient income streams and capital preservation benefits.