Five potential upsets to watch

The following is an extract from our 2025 global outlook.

As Harold MacMillan observed in the 1960s, “events, dear boy, events” represent a constant irritant for those in the business of making forecasts. With the former UK prime minister’s comment in mind – and amid the uncertainty around Trump’s plans and his ability to implement them – we look for places where widely anticipated implications of his agenda could prove inaccurate.

Rather than taking positions based on the probability of tariffs or corporate tax cuts, we think it is more productive to look for evidence of poorly calibrated confidence in the market impact, as noted in Tim’s piece.

Potential surprise 1: Tariffs have no impact on risk appetite

In terms of pricing, we see evidence of the market engaging with tariff trades. European tariff-exposed names are down 15% since June1 ; Treasury/bund spreads have widened by 50 basis points since September, as at the time of writing; and there’s been aggressive inversion of the US inflation curve since August, with no change in European or UK inflation curves. All this has happened alongside nebulous concerns that tariffs are an underpriced risk. We struggle to make these things consistent

Potential surprise 2: USD dominance disappoints 

There are widespread expectations that tariffs imply a stronger US dollar, due to FX moves re-equilibrating trade flows in response to a relative price change and upward pressure on rates from higher inflation. We think that view ignores the potential impact on capital flows. As a country with a trade deficit, the US needs continually to attract overseas capital.

Potential surprise 3: US inflation fails to ignite

As a team, we go into year-end short duration, as speculation can build on what the new administration means for the inflation and fiscal outlook. But we intend to rotate that position back to a more structurally positive duration outlook once that reset in expectations is done. Curve steepening is a clear Trump trade that could come unstuck as the year progresses.

Potential surprise 4: EAFE to outperform (finally) 

Amid conviction in yet more US equity outperformance, investors are prepared for the worst in Europe, Australia and Far East (EAFE) equities. But with the hurdle for positive surprises low, we will be looking to add risk in non-US equities where we see opportunities. Japan is likely to be toward the top of this list. Investor appetite for Japan is subdued, while corporate profitability has been on a rising trend, with little by way of multiple expansion.

Potential surprise 5: Renewables beat expectations

There are expectations that Trump may take aim at the Inflation Reduction Act, which has been a big support to renewables in the US. However, there are reasons to believe Republican lawmakers may not repeal the act, at least not wholly, as noted by Aanand. The large proportion of jobs created by the act being in Republican jurisdictions, plus precedent for projects already underway to retain benefits, chief among them.

The above is an extract from our 2025 global outlook.