Reflecting on Bob Dylan’s words written more than 60 years ago, nowhere are changin’ times more apparent than in what’s been going on in global markets in 2025. With Trump’s return to the White House, fiscal divergence across regions, and a rotation away from US equities, Richard Carter, Head of Fixed Interest Research at Quilter Cheviot, outlines how multi-asset strategies are adapting to today’s fast-moving investment landscape.
This article was featured in our Multi-asset Fund Insights 2025, looking at the latest thinking and analysis into what’s going on within this key market segment. Readers can check out the full publication here.
2025 has been eventful thus far, to put it mildly, with political developments on the far side of the Atlantic taking a toll on financial markets. After several years of concentrated market returns — dominated by US equities and large tech stocks in particular — there has been a clear paradigm shift.
At Quilter Cheviot, our MPS strategies currently hold an overweight position in European equities, an underweight in US equities and neutral allocation to UK equities. US stocks remain above their 30-year average for valuations, and it is increasingly hard to justify this premium while European stocks trade below their 30-year average
Political developments have caused a significant regional rotation thus far in 2025, with diverging fiscal policies on either side of the Atlantic materially altering the respective growth outlooks. UK fiscal policy currently sits somewhere in between that of the US and continental Europe, as can be seen by the opposing pulls on gilt markets.
In Europe, the German election has seemingly brought a step change in the country’s approach to public finances. A sizable spending package has been written into law, involving an open-ended commitment to increase defence spending and a €500bn package (approximately 1% of GDP per year for 12 years) to improve infrastructure. Several other Eurozone countries have also committed to significant spending increases on defence.
In the US, the implementation of higher trade tariffs is essentially a form of tax. Tax cuts from Trump’s first term appear likely to be extended but on balance this seemingly amounts to a more conservative fiscal approach. There is also a far higher degree of policy uncertainty in the US, which we feel could provide a significant headwind to investment and therefore GDP growth.
Severe tariffs would have a “stagflationary” impulse – damaging growth through the disruption of supply chains and raising costs to US businesses and consumers, therefore also proving inflationary. This weakening of the US economic outlook led to a weakening of the dollar. US businesses didn’t seem such a safe bet for international investors with an uncertain economic backdrop, a weakening dollar, and tariffs impacting profitability. Having said that, it is worth highlighting the historical context of the US dollar depreciation, and the moves this year have not been outsized compared to the post-Brexit trading range.
Currency impact
There are a number of mechanisms and drivers for the dollar weakening but it is likely that FX traders and international investors drove it down through hedging some/more/all of their dollar positions – effectively “selling” dollars.
The situation regarding trade tariffs is dynamic and there’s a fair chance that it will have changed by the time you actually read this article! At the time of writing , the two 90-day pauses — lowering US tariffs on China to an overall rate of 30% and other countries to 10% — are a welcome development and it does tentatively feel like we have already seen a high-water mark with regards tariff levels.
It appears that the worst-case scenario has been avoided, and we take some comfort in seeing that while Donald Trump may not be as sensitive to negative market movements as during his first term, he does still have a watchful eye in this regard and that the bond market seemingly still represents something of a guardrail against more destructive policies.
That said, the tariff rates in place during the pause (as well as the 10% rate on the UK following the UK-US trade deal) are still substantially higher than they were previously and serve as a headwind to global trade.
Outlook
Finally on outlook, we’ve seen some good progress from the Trump administration on trade deals, helping global equities and the US dollar recover some ground. Positive US sentiment had gone too far coming into 2025 and the “triple win”, one-way bet meant US equities and the US dollar were a little overvalued. However, we don’t see this as a paradigm shift and still see fantastic opportunities for UK investors in US equities over the longer term. I wouldn’t be surprised to see further dollar weakness but for it to be sustained, we would need to see strong growth catalysts in the UK and Europe — which ultimately should benefit our portfolios, leading to a rebalancing of growth drivers and opportunities rather than being a downside risk we need to mitigate.
Geopolitical uncertainty is clearly elevated, with the Middle East, Russia/Ukraine war and India/Pakistan clashes all causes for concern. We like fixed income investments in the current environment, due to historically high yields on offer and the potential for cushioning a portfolio should stocks take another leg lower. We also find hedge funds attractive due to the macroeconomic backdrop and also the potential portfolio diversification benefits should stocks and bonds start to move in a similar fashion — like we saw in the US recently when Treasuries declined alongside stocks.
About Richard Carter
Richard is Head of Fixed Interest Research at Quilter Cheviot. Before joining the firm in 2011, Richard was an analyst and fixed income fund manager at Barings and BNY Mellon. He has been working in bond markets for around twenty years and is a Chartered Financial Analyst (CFA).
