Aviva Investors, the global asset management business of Aviva PLC (‘Aviva’), believes that the majority of the major policy shocks have now happened, and that the last quarter of 2025 will be dominated by how the world reacts. While the new tariff regime in the US has been largely accepted by the rest of the world, the magnitude of the change should not be downplayed.
The Aviva Investors investment team expect an effective tariff rate of around 15 per cent in the US, a six-fold increase. This equates to a tax rise of around 1.5 per cent of GDP, which will have to be absorbed in combination between businesses in the form of lower profits and households in the form of higher prices and lower real spending. Much of this impact is still to come through – having been delayed by the boost in imports ahead of the tariffs and the temporarily lower tariff rates seen in the middle of the year. As such, the team expects it will weigh on spending in the US through to the end of 2025 and into early 2026.
Aviva Investors’ central forecast for global growth is around 3% for the rest of 2025 and 2026, a modest upgrade on its earlier projection that mainly reflects a somewhat less negative impact from tariffs on growth in the US and elsewhere. That said, it is expected that growth in the US will be markedly weaker than in 2024, rising by 1.8 per cent for the calendar year and 1.5% in Q4 compared to a year earlier. Growth is then expected to recover to around trend.
As the ongoing effects of global trade policies ripple out across the world, central banks will be attentive to both the downside risks associated with slow growth and weakening labour markets, alongside the uncomfortably persistent inflation seen in many economies. That trade-off is expected to be most stark in the US, where the Federal Reserve re-started the cutting cycle in September, following a pause of nine months, with another 100-150bps in cuts priced by financial markets over the next twelve months. But with inflation expected to rise and the labour market predicted to weaken, it will be the balance of those two forces that determines whether there will be fewer or more cuts than priced. The balance of risks seem tilted more to the downside.
In the Eurozone, growth of 1.2% is expected this year, a little above consensus, with domestic demand reviving as consumer spending improves. The fiscal impulse should grow in 2026, supporting slightly better growth next year. While the UK saw growth surprise to the upside early this year, household demand remains anaemic and investment weak. Growth of 1.2% is expected this year, with next year remaining sluggish. The Budget in November will likely deliver further tax increases, adding to the growth headwinds.
In terms of the investment team’s asset allocation views, with the major policy events likely now tailed off, the market must now digest how the aftershocks play out. For global equity markets, the team think the central scenario of slower growth, but not recession, alongside easier monetary policy and a number of thematic drivers should continue to support returns. The AI thematic remains the dominant one and is a key driver for US equities in particular, but with the theme broadening, other sectors and geographies can start to benefit. As a result, the team prefer to be overweight equities, with a relatively broad geographical allocation. That said, they are conscious of the growth and inflation risk cases, either of which would be challenging for returns were they large enough.
Within fixed income, the team think that front-end pricing is roughly fair for the central scenario and that term premia could widen further on rising global issuance and perceptions of risk to Fed independence. That said, the team believe that downside growth risk is sufficient to have a small overweight in duration. In credit, the central scenario is again one in which already tight spreads will be unlikely to widen much even as ex-ante returns look increasingly meagre. But with limited upside the team prefer to be neutral. Finally, in FX it is expected that the US dollar will continue to weaken, with hedging flows a key factor, supported by narrowing rate differentials.
Michael Grady, head of investment strategy and chief economist at Aviva Investors, said:
“Policy disruption has been the central focus for financial markets througout 2025. The second Trump Presidency brought with it a raft of policy changes that have upended decades of free trade, easy global movement of capital and people, and benign fiscal policy. The changes were so vast, the ultimate motivations so unclear and the implications so difficult to assess, that uncertainty soared and, for a period at least, financial markets swooned.
“However, the major policy shocks now appear behind us, and the focus of financial markets will shift towards the longer-term implications. Central banks will need to be attentive-to the risks as they navigate a slow growth environment, coupled with persistent inflation across many major economies.”
The Aviva Investors quarterly House View represents the best collective judgement of Aviva Investors on the current and future investment environment, whilst explaining our thinking and reasons for our current economic views and investment decisions. The Q4 House View and archive can be found here: https://www.avivainvestors.com/en-gb/views/house-view/
