Key points

• Trade disputes and tariffs may lead to a rise in inflationary pressures in the US, increased economic headwinds and heightened market volatility.
• The US faces significant fiscal challenges, including high debt, persistent deficits, and structural spending issues, which may impact economic growth and interest rates.
• Some European countries are increasing spending on defence and infrastructure, potentially paving the way for better growth.
• While technological breakthroughs and stimulus hopes have lifted sentiment around China, valuations of Chinese equities remain compelling.
• For multi-asset investors, volatility offers the chance to take advantage of market dislocations across asset classes.
   

Trade disputes and uncertainty over US economic growth have led to questions over a possible recession, contributing to a volatile investment backdrop. But where there is volatility, there is opportunity, says Newton’s Janice Kim.

Kim notes how the Trump administration’s threat of tariffs has led to a rethinking of trade policy and protectionism around the world. It is also hastening the deglobalisation trend of recent years.

Additionally, with the US no longer willing to be the world's policeman, countries and regions like the European Union (EU) are mobilising to look after their own security. Germany’s stimulus package, for example, is aiming to bolster the nation’s defence capabilities and revitalise its infrastructure¹.

“These actions signal a potential shift in Europe’s economic strategy, with some optimism that the EU is moving away from decades of fiscal constraint and paving the way for higher GDP growth,” says Kim.

Heightened near-term uncertainty could drive increased market volatility. “But as multi-asset investors, volatility allows us to take advantage of market dislocations across asset classes and to find attractive entry points for areas of long-term opportunity,” she adds.

The end of US exceptionalism?

“The Trump administration’s ‘America First’ approach has set in motion several changes which could alter the relative attractiveness of different markets. And this begs the question of whether we are at the beginning of the end of American exceptionalism, and by extension the US bull market,” says Kim.

Kim says that uncertainty around the inflationary impact of the administration’s tariffs and headlines around layoffs by the US Department of Government Efficiency (DOGE)² are potentially beginning to affect consumer and business sentiment.

Some estimates of real GDP growth – like that of the Atlanta Federal Reserve – have the US economy contracting in large part driven by a deceleration in consumer spending, which makes up about two thirds of US GDP³.

“Reduced spending could damage company profits, leading to lower investment by business along with job cuts, putting further pressure on consumer sentiment,” says Kim. This would create headwinds for US economic growth, increasing the possibility of a recession and interest rate cuts. However, she adds, any inflationary pressures brought on by tariffs and limits on immigration could make rate cuts more difficult.

Where next for the US?

One market perspective, notes Kim, is that a recession could be a quicker way to lower interest rates and reduce the government's debt interest burden. Total fiscal spending for the US in 2025 is expected to be about US$7 trillion against US$5.1 trillion in total revenue, leaving a deficit of US$1.9 trillion, or about 6% of GDP⁴.
 

The US administration would like this to be reduced to 3%⁵. But Kim believes achieving this will be challenging as approximately 75% of US government spending is mandatory, on areas including social security, public healthcare, and interest payments on government debt^6. And discretionary spending includes areas such as defence, air traffic control and customs and border protection, which could also be difficult to reduce.

“In short, the US faces a significant fiscal challenge,” says Kim. “The combination of high debt, persistent deficits, and the structural nature of government spending makes a quick or easy solution unlikely in our view.”

Compelling China?

Turning to China, Kim argues that while the country continues to experience headwinds, the mixed assets team believes the positives outweigh the negatives. Challenges include an ageing population and shrinking workforce. Additionally, a fall in house prices across major Chinese cities has reduced consumer confidence on the back of a broader economic slowdown since Beijing lifted Covid lockdowns.

However, Kim adds: “There is potentially a lot of household capital savings to be unlocked and the government may roll out additional policy support to address its headwinds and hit its 5% GDP growth target.”

Furthermore, the Chinese government has pushed hard on innovation in the face of restrictions on advanced semiconductors and semis equipment into the country⁷. DeepSeek is one example in practice of this innovation challenging Western players.

“Valuations remain compelling in our view, with the market still trading at around 12 times forward 12-month earnings. To that end, we have been increasing our China exposure,” concludes Kim.

The value of investments can fall. Investors may not get back the amount invested.

¹ FT. Germany’s Friedrich Merz strikes ‘game-changing’ deal to boost defence spending. 5 March 2025.

² APnews.com. A comprehensive look at DOGE’s firings and layoffs so far. 22 February 2025.

³ Source: US Bureau of Economic Analysis as at Q4 2024.

⁴ CBO ‘The Budget and Economic Outlook: 2025 to 2035’ 17 January 2025. https://www.cbo.gov/publication/60870. (CBO projection from 2025).

⁵ Americanprogress.org. Scott Bessent’s 3 Percent Deficit Target Would Require Massive Cuts to Anti-Poverty Programs and Middle-Class Tax Increases. 15 January 2025

⁶ CBO ‘The Budget and Economic Outlook: 2025 to 2035’ 17 January 2025. https://www.cbo.gov/publication/60870. (CBO projection from 2025).

⁷ Guardian. Chip war ramps up with new US semiconductor restrictions on China. 3 December 2024.