Investment Outlook Q1 2025: Tariffs post “Liberation Day”

As at 10 April 2025
 

Key observations: 

Economic outlook  

• One quarter into 2025, our outlook for the year is partly playing out with a correction arriving with larger size and volatility. There seems strong political willingness to push through changes to tariffs, following on from slowing immigration and government efficiency job cuts. Short-term pain, and even a recession, seems to be an acceptable risk to the Trump Administration in pursuit of a stronger long-term economy through tax cuts and regulatory streamlining. The path is rocky and volatile, as much is being disrupted by the size and scope of tariffs and the uncertainty for other countries, business and consumers.
• We see negative impacts and uncertainty ruling for the next few months due to the size of tariffs, retaliation by major countries, and no short path through any negotiations. Economists and strategists are now resetting forecasts, which we believe to be materially on the downside. The second order impacts are more meaningful than tariffs themselves, with uncertainty impacting business and consumer sentiment, leading to deferrals or freezes in activity. Our view of positive developments is being pushed back to much later in 2025 or even early 2026. 
• The sequence of “US-first” policy announcements is impacting financial markets and is affecting consumer and business sentiment with more likelihood of a material slowdown or recession in the US. Australia is likely to have mixed impacts, with lower tariff impositions but a strong trade linkage to China which has higher tariffs.
• Inflation is at risk of surging short term based on anticipated tariff impacts.  We note some commentators believe that deflation is also a risk as demand is expected to be seriously impacted but overall, some inflation is more likely alongside demand downturn.
• Labour markets are likely to weaken further, as businesses hold back hiring decisions and the US government retrenches workers as part of the efficiency program. Australian businesses are likely to hold back hiring.
• Money flows are heading out of the US as the ‘US Exceptionalism’ rhetoric comes under pressure, and the US dollar weakens from a peak early in 2025. Overall net liquidity was neutral, and cash reserves will be built up.
• Market-implied pricing initially signalled policy easing by the US Fed and Australia’s RBA due to a sharp slowdown and rising unemployment. However, markets have evolved to pricing in a higher risk of stagflation. We expect that central banks will prefer to see more evidence before acting and would only move if there were systemic or financial payments system risk. This might surprise if there are pockets of banking reserve problems or collateral default risk for derivatives.   
   

Market scenarios for 2025 

• Under our base case for the year in aggregate, we see an extended period of volatility in markets.  Unless there is major policy intervention by central banks or government treasury agencies, we expect negative sentiment and momentum to continue across equity and other growth assets.   
• The ability for politicians to take painful medicine early in a new term of office is not unusual but is more extreme in the Trump 2.0 world. We hear that the US administration is prepared to take the tough medicine, however we need to assess how long the electorate will tolerate that in the lead up to the US mid-term elections. We do expect the focus to shift to getting positive policies to work in time for the political campaigning season for the late 2026 mid-term elections. 
• A less publicised development is the proposed major stimulus step-up by Germany under their new coalition government. This has significant stimulatory potential for Europe, based on deficit-funded spending for defence and infrastructure, at a level that has not been seen since the reunification of West and East Germany. 
• Credit markets were extremely well supported with spreads narrow until the April 2nd tariff announcements which saw a significant widening in credit spreads. Due to less liquid trading conditions in corporate credit, we have seen some funds starting to implement wider buy/sell spreads to protect existing unit holders. Government rates had fallen but have risen as market participants assess more likelihood of a stagflation environment, i.e. higher inflation and lower growth.  
• Our central case is now for a net negative return for equities for much of the year, reducing our view from a more positive end of year performance for equities previously.  Our forecast late last year was for at least one correction this year, within a normal bound but we are now more negative on the outlook. 
• For downside scenarios we assess if there is an extended negative and grinding bear market based on more severe perceptions of downside. We see risk of a ‘sudden stop’ in retail and business activity as many adopt a ‘wait and see’ approach and hoard cash. There may be a cascading of downward revisions in company earnings and reset of multiples, creating room for material downside. 
• On the upside, if we see the US Federal Reserve being forced to cut cash rates much earlier, or a significant reversal of tariff policy, then that will be very stimulatory for the markets immediately and for the economy in the second half of the year.  
   

Longer-term themes for the next few years 

• Geopolitical volatility is the ‘new normal’ and must be factored into investment analysis. We see higher political uncertainty indices. 
• Climate change costs continue to rise, particularly with rising demands from data centres and AI. 
• ESG as an investment theme fades with ESG labelling being removed or downgraded. 
• High government debt loads have an impact on regular, typically four-year refinancing cycles. The risk of higher bond volatility has risen. 
• Technology curves converge and accelerate with merging AI, blockchain, hyperscale data and compute. 
• Popular themes and narratives interact, creating waves of cheap vs expensive thematic investing opportunities. 
• Generational disruption and challenge to traditional institutions from a more polarised society. 
   

Anecdotes that intersect the long-term view with right now 

• Diversity, Equity, and Inclusion (DEI) initiatives are being removed from government agencies’ priorities. 
• Gold continues to new highs, exceeding USD $3000, reflecting concerns of monetary debasement. 
• Defence spending in Europe is set to rise materially as the US disengages from NATO and Ukraine funding.  
   

Tactical Asset Allocation 

Factor	Rationale
Fundamental – Negative	US soft economic data is deteriorating sharply with the level of political uncertainty and tariffs likely to significantly impact economies and companies. We now expect this to flow into hard data in the coming months and drive a significant slowdown. We expect some reprieve from negotiations but for overall tariff levels to remain higher than the start of the year. China will be heavily impacted by tariffs but has some room to implement fiscal policies. We expect more details in the coming weeks, but it remains to be seen if it will be sufficient to support the economy. The Australian economy will rely on China’s policy response and ability to mitigate the slowdown.
Valuation – Moderately Negative	MSCI World multiples are now in-line with historical averages but consensus expectations for earnings growth are yet to be revised downwards. Credit spreads have spiked up and look more reasonable but may continue to widen in the near-term on recession fears. The market is now pricing in three US rate cuts in 2025 and for the RBA to cut five times in 2025. We continue to see bond yields as trading within a range given that the outlook for inflation is still unclear. The risk of stagflation will likely keep a floor on yields.
Technical – Moderately Positive	Sentiment is bearish and equity positioning has come down as a function of market movements but flows into markets remains strong, indicating that we have not yet seen capitulation. There has been another rotation into Defensives and Quality, away from Cyclicals and Value, while Growth continues to suffer. We see the rotations as evidence of higher uncertainty and volatility, with the market yet to stabilize.
Overall view for growth asset classes.	We expect ‘Liberation Day’ to be significantly negative for the outlook even though we expect much will be rolled back. The key issue is uncertainty driving a freeze on business and consumer spending. We now have a negative view on Fundamentals and expect data to deteriorate further. Technicals are still Moderately Positive, but price action indicates continued uncertainty. Valuations are improving but remain moderately negative as earnings revisions have further to go. We have trimmed growth exposure and are now underweight Australian Equity and Global Equity, partly offset by an increase to Property & Others, predominantly in Growth Alternatives.

  

 

This information is general in nature and is provided by Partners Wealth Group. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.