A volatile start to the year has recalibrated markets, inviting a regionally diversified approach according to Henk-Jan Rikkerink, Global Head of Solutions and Multi Asset at Fidelity International. Looking ahead, he discusses how the diverging regional lines across the US, Europe and Asia are impacting the firm’s investment outlook for the quarter ahead.
For markets, the early months of Donald Trump’s presidency suggest some regional recalibration is in order. After initially focusing on the positives of the White House’s policy agenda, investors have signalled their concern at an increasingly hawkish approach to trade in particular.
Meanwhile two of the US’s prime targets have actually rebounded well this year. Europe has been supported by policymakers’ renewed fiscal vigour, while China has shown it is serious about lifting domestic consumption to mitigate the impact of tariffs.
As the world adjusts following a bumpy start to 2025, the outlook for the next quarter is shaped by this continuing divergence.
Don’t underestimate the US
There are clear risks circulating around US markets now. We anticipate a potential battle between reflation – driven by fiscal easing and stagflation – with tariffs and a restrictive immigration policy likely to hamper growth.
Clearly markets are beginning to worry. US stocks fell in March from their all-time highs, and concerns are starting to feed through to consumer confidence, although the extent of the decline is not yet clear.
All this has happened remarkably quickly, and Trump does have an end game in mind – an improved trade balance and the onshoring of manufacturing – which would potentially benefit US stocks over time. And the S&P 500, despite its recent reversal, remains full of quality companies that are relatively well insulated against the impact of tariffs. These still warrant a place in any long-term portfolio.
Moreover, the US economy has proven broadly resilient, even if some soft data is starting to turn downwards. Corporate and household balance sheets are strong, which should support higher profit margins, abetted by the prospect of further tax cuts and deregulation.
This year, and this presidency, are just three months old. The picture is likely to stabilise soon. And history tells us that investors who bet against the S&P over the long term do so at their peril.
From an asset allocation perspective, we still see opportunities in the US, but will be watching the evolving fiscal backdrop closely.
A new Euro vision?
Uncertainty in the US has encouraged investors to look elsewhere. For the first time in a while, eyes are turning across the pond.
That’s due in large part to the European response to the US’s more isolationist approach, spearheaded by the new German government. The region has finally turned on the fiscal taps, investing heavily in defence. German Chancellor Merz, meanwhile, has managed to engineer the fiscal U-turn that brought the previous government to its knees.
In years to come, could this be seen as the watershed moment that inspired a long-evasive period of European growth? The market seems to be thinking in these terms, rallying especially around the defence and industrial names most likely to benefit from Europe’s fiscal injection.
It’s easy to get swept up by market noise, good as well as bad. It is not clear how this spending filters into wider European earnings beyond the immediate beneficiaries. Nor does it necessarily solve some of the demographic and technological problems that have curtailed growth in Europe for the past decade. Policymakers in the region have grappled with plans to increase the region’s competitiveness, but with little sign so far of tangible progress. And we shouldn’t dismiss the risks emanating from US trade policy just yet. We’re neutral on Europe in our asset allocation, balancing attractive valuations and favourable policy backdrop with a still fragile recovery.
China is back
The Trump administration has imposed a total of 20 per cent additional tariffs on Chinese imports, moving trade policy forward at a much faster pace than in his first term. Yet our analysts are not unduly concerned. Only around a quarter of those focusing on Chinese companies expect tariffs to negatively impact profitability (compared with nearly three-quarters of US analysts).
Chart 1: A tale of two sentiments
In part that’s because China has made clear its intentions to mitigate the impact of US tariffs by boosting consumer spending and therefore domestic demand. The government now recognises increasing disposable income and hiring as its top priority. Recent measures designed to achieve this aim have been significant if not stupendous, while Premier Li has expanded the overall fiscal package by raising the official deficit target to 4 per cent of GDP.
China has also reasserted its tech capabilities this year. Long considered to be vastly behind the US, the success of DeepSeek’s latest model, built at dramatically reduced cost to comparable efforts from US companies, has reversed that narrative and suggests investors will be encouraged to reconsider allocating to the country.
The Chinese government appears to be capitalising on this trend towards innovation by actively improving relations with private technology companies. The success of AI in the country could then prove a wider boon to productivity, translating into improved earnings across the economy.
Once again, China is pushing itself towards the front of investors’ minds. From an asset allocation perspective, we’re becoming more positive on China – given evidence of this rally being better supported by fundamentals, especially in the tech sector.
What does this mean for asset allocation?
Today’s uncertain market backdrop throws up fascinating opportunities for asset allocators. We’re more cautious on risk assets overall, but as we move into Q2, decisions between specific sectors, regions and parts of the capital structure will become increasingly important.
Further insights can be found on the Fidelity International website: Q2 Outlook Webinar: The post-trade trades
Main image: nasa-1lfI7wkGWZ4-unsplash
