The global investment opportunity landscape is expanding amid volatility

By Raj Singh
Portfolio Manager, Multi-Asset

After several years of solid growth, the global economy is confronting a new policy-driven shock. The swift and stringent trade policies introduced by the new U.S. administration pose one of the most formidable challenges, threatening the established norms of global free trade and the dominance of the U.S. dollar. This negative shock is intensified by heightened uncertainty, stemming from the rapid-fire policy announcements from the U.S., which are reverberating across the global economic landscape.

Europe and China are by no means immune to the negative global headwinds. Yet, with fiscal policymakers moving to offset growth risks, forcefully shifting away from fiscal conservatism in the case of German policymakers, economic concerns have begun to subside somewhat. Whether Europe and China can deliver sufficiently in the face of the downside global growth risks may determine the lasting trend of U.S. exceptionalism.

Currently, the Federal Reserve is hesitant to implement additional rate cuts due to the lack of clear evidence necessitating immediate support, persistent inflation above target levels, and the elevated uncertainty surrounding government policies, which complicates monetary decision-making. The Fed is likely to adopt a cautious approach, preferring to wait for greater policy clarity and a clearer economic outlook. We expect three to four rate cuts this year, but the path to ease has become narrower and more uncertain.

While global markets outperformed in the first quarter, they remain vulnerable to U.S. tariffs. A risk-off sentiment is expected to linger, although supportive policies in China may help cushion the downside. The landscape for global investment opportunities is expanding, with Europe, China and India taking on more prominent roles.

U.S. markets are likely to remain volatile until economic fears dissipate. The “Magnificent 7” have been central to market weakness, as investors question high valuations, the ability to meet ambitious earnings forecasts, and exposure to international revenues amid a slowing global economy. Additionally, new competition from Chinese firms in the AI sector is challenging the established assumptions of U.S. tech dominance. The U.S. technology sector will likely deliver strong returns in the medium to long run as structural case for AI remains intact despite short term challenges. In this environment, defensive sectors and companies with strong cash flow generation will likely remain attractive.

Valuation differentials have narrowed, highlighting the value of global diversification. Historically, U.S. and European valuations appear high, though U.S. valuations are relatively more attractive than at the start of the year. China remains undervalued compared to the broader market, but its recent strong performance has brought its valuations in line with historical averages. Japan appears historically inexpensive, while India’s valuations are less stretched than earlier this year, suggesting that a pullback in Indian equities may offer a favorable entry point, especially as foreign selling and earnings revisions are expected to bottom out.

In fixed income markets, both investment-grade and high-yield bonds are backed by solid balance sheets and manageable maturity profiles. However, credit spreads have widened significantly, particularly in the high-yield sector. If the U.S. can sidestep a recession, default rates are likely to remain low, keeping spread widening relatively contained. Fixed income assets could provide stability and income in volatile times, but active management and careful issuer selection will be crucial in navigating the shifting landscape influenced by changing rate expectations, global trade policies, and evolving investor sentiment.