Aviva Investors has released its latest House View, saying that it expects major policy uncertainty to continue to cause unpredictability in markets as we go further into 2025.
The group also said that it believes tariffs will continue to dominate outcomes, with the imposition of reciprocal tariffs on 2 April the most damaging so far. Aviva Investors estimates that they increase the effective tariff rate to around 25 per cent, a level not seen for over a century.
Aviva Investors’ framework on the longer-term impact of tariffs remains unchanged: if used primarily as a bargaining tool, they are likely to have only a limited impact on trade and growth; but if used to either actively try and change global trade flows and imbalances or to raise large amounts of revenue, the impacts will be far greater.
The uncertainty created by the process could prove to be damaging to activity, with households becoming more cautious in their spending decisions and businesses delaying investment and hiring. While targeted tariffs on specific sectors or countries might have been more damaging for those exporting countries facing the tariff, broad-based high tariff rates are expected to be more damaging for the United States than elsewhere, depending on the extent of retaliation.
The inflation outlook in the US this year is highly uncertain because of tariffs, with inflation now expected to rise through the first part of 2025 to around 4 per cent. The inflation outlook for the Eurozone is little changed, with US tariff effects assumed to be small. As such, Eurozone inflation is expected to moderate only gradually back to towards target. In the UK, recent developments in energy and administered prices push up on in inflation in April, with a peak of around 4 per cent expected in the middle of the year, before a relatively swift decline to close to the 2 per cent target.
Aviva Investors’ medium-term view on interest rates is little changed. A return to the post-GFC era of policy rates at or near the lower bound is not expected. Neutral real rates have risen and the distribution of inflation shocks is likely to be more symmetric than in the past, delivering a higher average inflation rate. In its central case, Aviva Investors expects somewhere between 25-125bps of rate cuts across the Fed, ECB and BoE this year, with BoJ expected to raise rates. But the trade-off is expected to become more challenging, especially in the US. If output weakens and unemployment starts picking up in any of the large economies, we would expect to see more rate cuts than currently priced in the second half of 2025.
Aviva Investors remains tactically slightly underweight equities, given the risk of a more material move lower should the uncertainty remain and broad-based tariffs stay in place, but is also cognisant of opportunities this correction has opened should uncertainty reduce significantly.
The team prefers to be overweight government bonds, with that focused on the UK, but with an underweight in Germany, reflecting the likelihood of faster rate cuts from the BoE and the impact of looser fiscal policy in Germany. It is modestly underweight US high yield credit – which has outperformed risk assets and looks expensive relative to the risks – offset by a modest overweight in European high yield.
In currencies, the team is modestly underweight the US dollar against the yen and euro, with the balance of risks to a sharper slowdown and potential for structural outflows weighing on US assets.
Michael Grady, head of investment strategy and chief economist at Aviva Investors, said:
“While the global economy entered 2025 in reasonable shape, with reasonable growth, more balanced labour markets and more moderate inflation, the near-term outlook has deteriorated on the back of elevated uncertainty and a damaging trade war, particularly in the US where we expect little growth on a sequential basis for the first nine months of the year, and calendar-year growth of 1.3 per cent.
“A full-blown trade war could see global growth fall to below 2½ per cent: outside of the GFC and Covid, the weakest in decades. Looking further ahead, we assume that the trade war uncertainty will be largely resolved by the end of this year, opening up the potential for a rebound in sequential growth driven by tax cuts in the US and the ramping up of defence and infrastructure spending in Europe.”
The Q2 House View and archive can be found here: https://www.avivainvestors.com/en-gb/views/house-view/
