Issue date: 2025-07-09
Part 1: Markets Review
Global shares advanced in May as concerns over tariffs eased. The US and China agreed a 90-day suspension of tariffs on most goods. Sovereign bond yields rose (meaning prices fell) amid rising worries over debt sustainability.
Overview Total returns (net) %
to end May 2025 | 1 month | 12 months | ||||
Equities | USD | EUR | GBP | USD | EUR | GBP |
MSCI World | 5.9 | 6.1 | 4.9 | 13.7 | 8.7 | 7.4 |
MSCI Emerging Markets | 4.3 | 4.4 | 3.3 | 13.0 | 8.1 | 6.7 |
MSCI AC Asia ex Japan | 5.3 | 5.4 | 4.3 | 14.8 | 9.8 | 8.4 |
S&P500 | 6.3 | 6.4 | 5.3 | 13.5 | 8.6 | 7.2 |
TOPIX* | 3.9 | 4.0 | 2.9 | 12.8 | 7.9 | 6.5 |
1 month | 12 months | |||||
Government bonds | USD | EUR | GBP | USD | EUR | GBP |
JPM GBI US All Mats | -1.0 | -0.9 | -2.0 | 4.9 | 0.4 | -0.9 |
JPM GBI UK All Mats | -0.4 | -0.2 | -1.3 | 7.2 | 2.5 | 1.2 |
JPM GBI Japan All Mats** | -2.5 | -2.3 | -3.4 | 5.7 | 1.1 | -0.2 |
JPM GBI Germany All Traded | -0.5 | -0.4 | -1.4 | 8.5 | 3.7 | 2.4 |
Corporate bonds | USD | EUR | GBP | USD | EUR | GBP |
BofA ML Global Broad Market Corporate | 0.2 | 0.3 | -0.8 | 7.6 | 2.9 | 1.6 |
BofA ML US Corporate Master | 0.0 | 0.1 | -1.0 | 5.8 | 1.2 | -0.1 |
BofA ML EMU Corporate ex T1 (5–10Y) | 0.5 | 0.6 | -0.4 | 12.1 | 7.2 | 5.9 |
BofA ML £ Non-Gilts | 0.7 | 0.8 | -0.3 | 10.7 | 5.9 | 4.5 |
Non-investment grade bonds | USD | EUR | GBP | USD | EUR | GBP |
BofA ML Global High Yield | 1.5 | 1.7 | 0.6 | 10.0 | 5.2 | 3.9 |
BofA ML Euro High Yield | 1.3 | 1.4 | 0.3 | 13.7 | 8.7 | 7.3 |
Source: LSEG DataStream. Local currency returns in May 2025: *5.1%, **-1.3%.
Part 2: Global Economic Outlook
The 90-day pause in reciprocal tariffs between the US and China reduces the risk of a sudden halt in trade and a sharp increase in unemployment. As a result, we believe the risk of recession has diminished. We have therefore upgraded equities to a positive stance, with a focus on financials in the US and Europe. This sector continues to benefit from steeper yield curves and is relatively less exposed to trade-related risks.
Beyond the short-term trade developments, our broader investment stance continues to reflect heightened geopolitical uncertainty. We believe the disruption caused by the Trump administration still casts a shadow over the narrative of US exceptionalism. One of the key themes we outlined in our December notes – dispersion - has so far proven to be the defining trend of 2025. In this environment, we have moved away from a concentrated US equity focus, as held last year, toward a more geographically diversified exposure. This year we have favoured Europe but also include Japan and emerging markets. Consistent with this broader theme, we remain positioned for US dollar weakness.
We maintain a neutral view on government bonds. While yields have risen and valuations have improved, medium-term concerns remain due to increasing debt levels and lingering inflation risks in the US. Although market expectations have moved closer to our outlook, we still anticipate less policy easing from the Federal Reserve (Fed) than is currently priced in. Outside the US, inflation concerns are more muted, and we have gone long on Bunds versus US Treasuries. We continue to favour gold as a portfolio diversifier and remain negative on energy due to strong supply growth. We are also cautious on US credit - particularly high-yield debt - as technical indicators are weakening, removing a key support for spreads.
Part 3: Multi-Asset View
Asset classes | Sector | View |
Equity Asia ex Japan | US | Reduced tariff uncertainty has alleviated key market concerns in the short term. This, coupled with supportive fiscal policies, and an uptick in earnings revisions, creates a supportive environment moving forward. |
UK | We stay neutral on UK equities where sector composition is naturally more defensive. UK equities are less exposed to global tariff risks; however, limited fiscal headroom and persistent inflation constrain policy flexibility. | |
Europe | We maintain a positive view on European equities, as the implementation of expansive fiscal policies is expected to contribute to narrowing the disparity in economic growth between the US and Europe. | |
Japan | Supportive macro conditions such as rising inflation expectations, wage growth, and loose financial conditions - as well as positive sentiment from more tariff certainty - should benefit Japanese equities. | |
Global EM | The recent 90-day pause in reciprocal tariffs between the US and China has improved the near-term trade environment, prompting us to upgrade our view. Attractive valuations and a weaker US dollar continue to provide a supportive backdrop. | |
China | We remain cautious on China. While growth forecasts remain stable, there are concerns about domestic economic weakness and the inflationary impact of tariffs. | |
EM Asia ex China | Although Asian markets avoided immediate tariffs, their dependence on Chinese imports poses risks. | |
Government bond | US | Inflation expectations in the US are increasing, driven by factors such as a tight labour market, potential tariff impacts, and dollar weakness. This, combined with rising debt levels, leads us to hold a negative view on US government bonds. |
EM local | We maintain a positive view on EM debt. Economic activity in EM markets has remained robust and the sector should be supported by a weakening US dollar and high carry. | |
IG credit | US | We maintain our negative stance. Valuations are at extreme levels, and we are concerned that the backdrop for credit is starting to weaken. |
Europe | We remain neutral on European IG, where spreads are more attractive compared to the US. The technical environment is favourable, and demand seems to be improving. | |
EM USD | We remain neutral as valuations look expensive. We are closely observing the asset class which is predominantly concentrated in Asia and therefore susceptible to tariffs. | |
High Yield | US | We stay negative on US high yield. Technical indicators are weakening, removing a key support for spreads. |
Europe | We remain neutral. Valuations are more attractive compared to the US, with a lower spread duration and sensitivity, although the technical environment is showing signs of weakening. |
*Global Emerging Markets includes Central and Eastern Europe, Latin America, and Asia.
4. Conclusion: Investing beyond US exceptionalism
a. As the S&P 500 appears increasingly expensive, the landscape is shifting: There is potential for more efficient models emerging from various innovators, including those like DeepSeek, which raises intriguing questions about the US' enduring supremacy in sectors like artificial intelligence (AI). This signals that it may be time to broaden our focus and exposure beyond just US mega-caps from a global thematic approach to better capture growth.
b. Looking towards Europe: Europe, often overlooked, presents an attractive investment opportunity due to its appealing valuations. Current sentiment is largely negative, but that pessimism could pave the way for surprising outperformance. Ultimately, whether European markets exceed expectations or move in sync with US trends, the risk-reward profiles look compelling. By embracing these new horizons, we are better equipped to navigate whatever the market may throw our way.
c. Maximising diversification with alternative sources of income: To further enhance diversification with an investment portfolio, consider allocating to alternative sources of income besides traditional credit and equities. Two noteworthy options are:
Securitised credit: This sector has historically consistently outperformed other fixed-income assets in rising rate environments. It taps into various economic drivers, such as consumer behaviour and housing markets, and typically shows low correlation with traditional corporate credit, making it a powerful tool for diversification.
Insurance-linked securities (ILS): ILS offer attractive risk-adjusted returns and low correlation to conventional asset classes like equities and bonds. These securities are designed to transfer insurance risk associated with large natural disasters, opening up unique investment opportunities.
In summary, while US equities have performed admirably for valid reasons, it is essential for investors to adopt a more balanced and diversified approach to navigate uncertainty in a dynamic manner. Integrating European equities, exploring opportunities in non-mega-cap US sectors, and incorporating diverse, alternative income sources are all crucial steps toward building a diversified, resilient portfolio. By broadening the investment landscape, investors can better position themselves for potential outperformance and a resilient income stream in a dynamic market environment.
Important Information The contents of this document may not be reproduced or distributed in any manner without prior permission. This document is intended to be for information purposes only and it is not intended as promotional material in any respect nor is it to be construed as any solicitation and offering to buy or sell any investment products. The views and opinions contained herein are those of the author(s), and do not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. The material is not intended to provide, and should not be relied on for investment advice or recommendation. Any security(ies) mentioned above is for illustrative purpose only, not a recommendation to invest or divest. Opinions stated are valid as of the date of this document and are subject to change without notice. Information herein and information from third party are believed to be reliable, but Schroder Investment Management (Hong Kong) Limited does not warrant its completeness or accuracy. Investment involves risks. Past performance and any forecasts are not necessarily a guide to future or likely performance. You should remember that the value of investments can go down as well as up and is not guaranteed. You may not get back the full amount invested. Derivatives carry a high degree of risk. Exchange rate changes may cause the value of the overseas investments to rise or fall. If investment returns are not denominated in HKD/USD, US/HK dollar-based investors are exposed to exchange rate fluctuations. Please refer to the relevant offering document including the risk factors for further details. This material has not been reviewed by the SFC. Issued by Schroder Investment Management (Hong Kong) Limited. |