Aviva Investors, the global asset management business of Aviva PLC (‘Aviva’), sees US global dominance becoming more challenged. With rising protectionism, fiscal imbalances and weakening demand for the US dollar and Treasuries all noteworthy headwinds, the economic landscape will continue to be volatile and in large part shaped by decisions taken in the White House.
Tariffs will continue to be a key factor, with new levies expected to be imposed on pharmaceuticals, semiconductor and related imports. That said, while the effective tariff rate could rise (or fall) over the coming weeks and months as trade deals are hammered out, we do not expect it to change materially. As such, uncertainty about the final destination on tariffs may be clearer, but the impact on the US and global economy of a roughly six fold increase in US tariffs, to levels last seen in the 1930s, remains unclear.
The inflation outlook remains one of generally above target inflation gradually heading back down to around 2 per cent. In the US, inflation has softened more than anticipated in recent months, with no sign yet of tariff effects passing through. But we expect those to become evident in the coming months, with both headline and core inflation picking up from current rates to around 3.5-4 per cent.
The investment team’s central forecast for global growth is around 2.75–3 per cent for 2025–26, albeit the economic landscape remains volatile and continues to be shaped by decisions taken in the White House. While not envisioning a recession in any of the major economies, it would represent the slowest pace of global growth in recent decades, outside of major recessions.
With regards to economic growth, the most notable slowing is in the US, where growth is expected to halve this year to 1.4 per cent. The impact of higher tariffs is expected to weigh on disposable income and corporate margins, leading to slower consumer spending and investment. The stagflationary nature of the shock is likely to keep the Federal Reserve cautious in cutting rates, leaving policy modestly restrictive over the coming year.
Meanwhile in the UK, a strong start to 2025 is likely to moderate, with underlying growth notably softer than headline GDP might suggest. To the extent that the recent rise in inflation due to administered prices and indexing effects does not threaten to de-anchor inflation expectations, that should allow the Bank of England to cut interest rates further. However, there remains some underlying inflation persistence that lead to a slower easing cycle than was previously anticipated (one cut per quarter) until the Bank Rate reaches the terminal of 3.25 per cent.
In the Eurozone, the deceleration in wage growth is likely to continue adding to the disinflationary forces, but with growth improving we expect inflation to stabilise around 2 per cent, which means that our central scenario envisages that the ECB is done on its easing cycle – with a risk of delivering one more 25bps cut to 1.75 per cent.
With regards to asset allocation, uncertainty around the outlook remains, the Aviva Investors’ investment team judge that the probability of seriously disruptive trade policy has diminished and with it the risk of recession.
In Equities, the recent modest de-rating accompanied by robust EPS growth, strong balance sheets, high margins and lower rates point to potential modest upside in the second half of the year, meaning the team prefer an overweight. In Fixed Income, the team prefer to be broadly neutral government bonds, but with a preference to be modestly overweight the UK and underweight longer dated US and Germany, reflecting the likelihood of faster rate cuts from the BoE and the impact of looser fiscal policy in the US and Germany.
In credit markets, spreads have tightened and corporates again trade at historically tight levels, reflecting solid credit fundamentals and supportive ‘technicals’, but potential gains are small against possible losses if economic risks materialise. As such, the investment team prefer to be neutral with a bias for Europe relative to the US or hard currency Emerging Markets (EM). In FX the team hold high conviction on further dollar depreciation: the US fiscal trajectory is agitating market participants, who, to continue to lend to the US, would require a combination of higher yields and a weaker exchange rate for compensation. In other words, the erosion of US exceptionalism will drive the US risk premium higher and should weigh further on the value of the dollar.
Michael Grady, head of investment strategy and chief economist at Aviva Investors, said:
“Whilst the US has been the global hegemon for decades, the question has now arisen as to whether US exceptionalism is losing some of its lustre. The Trump administration has brought with it a dramatic increase in political, economic and market volatility. The dollar’s reserve status and Treasuries’ role in portfolios is also being questioned amid massive global exposure; investment imbalances may drive a shift toward non US assets and a weaker dollar.
There are reasons to expect over the longer term US equity market performance could be as strong as in the past. However, the desire for foreign holders to remain exposed to both the underlying asset performance as well as the US dollar may be shifting.”
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 Q3 House View and archive can be found here: https://www.avivainvestors.com/en-gb/views/house-view/
