(all data sourced via Bloomberg, Innova Asset Management, FRED, ABS unless stated otherwise)
In preparation for the release of our quarterly update for clients, we are in the process of compiling all the relevant information, views of the 6 months that were, positions and our outlook. So with that in mind, we have produced the below in the interim to provide you a short update.
The Year That Was: Jan–Jun 2025
The first half of 2025 has delivered a striking blend of macroeconomic disruption and asset class divergence. With Donald Trump’s re-election came a wave of policy turbulence: headline tariffs on Chinese imports (up to 55%), sweeping tax reform proposals under the “Big Beautiful Bill,” and a renewed stance on fiscal expansion. These decisions were made amid a backdrop of rising geopolitical tensions—from the Ukraine conflict to the re-emergence of hostilities between Israel and Iran in mid-June.
Markets responded dramatically. April’s so-called “Liberation Day” saw a steep acceleration in the U.S. equity downtrend, particularly in highly priced sectors such as technology. The Nasdaq plummeted nearly 20% over a short period, reinforcing concerns that valuations had run too far ahead of earnings. Conversely, defensively positioned markets such as the UK (FTSE 100) and Korean equities performed strongly, reflecting renewed interest in value sectors and international diversification:
Despite this instability, pockets of resilience emerged. Corporate earnings held up better than expected in Q2, encouraging a partial recovery in risk appetite. While U.S. mega caps struggled under the weight of tariff costs and uncertain profit margins, Korea surged ahead (+27.5%), buoyed by political reforms and exposure to AI-related semiconductors. UK equities also rebounded, aided by attractive valuations and stabilising domestic politics.
Australia remained relatively robust. Annualised GDP growth came in at 1.3%, the unemployment rate hovered at 4.1%, and inflation showed signs of easing. Although rate cuts were paused in June by the newly established Monetary Policy Board, the combination of floating-rate household debt and falling inflation suggests rate relief may continue in future. Ongoing Chinese stimulus and steady commodity demand also supported local economic resilience, although longer-term productivity and migration challenges remain.
While traditional safe havens failed to provide protection during market shocks (e.g. USD and U.S. Treasuries showed limited response to the Israel-Iran conflict), the volatility was somewhat contained by global fiscal activity. Most central banks, including the RBA, adopted a cautious approach to further tightening as fiscal authorities continued to drive economic momentum.
Outlook: Macro Themes Driving the Road Ahead
As we move into the second half of the year, the dominant economic narrative is shifting from monetary to fiscal leadership. The United States is now operating under what economists call “fiscal dominance,” with deficits running at wartime levels (around 6–7% of GDP). Over $28 trillion of federal debt requires refinancing by 2029, leading to a heavy supply of Treasury bonds and creating pressure across global funding markets.
This dynamic constrains central bank independence. The Federal Reserve’s ability to hike rates or shrink its balance sheet is now challenged by the risk of destabilising sovereign debt markets. Meanwhile, inflation—although easing in some categories like autos and food—remains structurally elevated due to embedded fiscal stimulus. The market’s belief in the Fed’s inflation-fighting credibility is also being tested as political instability (e.g., Fed leadership succession, Elon Musk’s political entry) adds further uncertainty.
We are entering a regime where traditional monetary tools carry less influence. Government spending is providing the primary engine for growth, particularly in the U.S. and parts of Europe. The implications for investors seems logical: short-duration equities, sectors linked to nominal growth, and geographies less exposed to U.S. fiscal fragility may be better placed to weather the volatility.
Earnings estimates for the S&P 500 are being revised lower as tariff impacts feed into corporate margins (see chart below). Consumer confidence and business surveys have also softened, suggesting risks to spending and hiring. However, there remains enough liquidity and income support to avoid a near-term recession. We continue to expect a soft landing, albeit with a slower trajectory than anticipated late last year.
From a market strategy perspective, the volatility in the USD and the deterioration in U.S. fiscal balance are reinforcing a global rotation away from U.S. mega caps. Investors are increasingly seeking value in select international markets, hard assets, and quality mid-cap names that benefit from real economy tailwinds and more attractive valuations.
Positioning: What Worked, What Didn’t, and What’s Ahead
Over the past quarter, our portfolios benefited from active diversification and select regional overweights. Korean equities led the way, returning 27.5% over the quarter, supported by political reform and positive sentiment towards AI-driven sectors like memory chips. UK equities also contributed meaningfully as investors sought defensive value in a market with low foreign participation and stabilising politics.
Our fixed income exposure, particularly in Australian duration and domestic credit, added positively to performance. These positions helped offset the volatility seen in global bond markets, where rising issuance and political uncertainty in the U.S. pushed yields higher. Our decision to increase currency hedging across global equities also paid off, as the USD weakened significantly following its 2024 highs.
On the other hand, our underweight to Australian banks (especially CBA) detracted from relative returns. Similarly, alternative strategies, including managed futures, underperformed, while real assets such as our lack of A-REITs caused a drag as they performed well.
We exited our position in gold miners and reallocated to silver, where valuation metrics and historical gold/silver ratios suggest stronger upside potential:
Source: Innova Asset Management, Bloomberg
Looking ahead, we remain underweight U.S. mega caps, which we believe face earnings risk and limited valuation support. Instead, we favour quality small caps, global cyclicals, and shorter-duration equities that offer resilience in a nominal growth environment. In fixed income, we continue to prefer high-grade domestic credit and selectively position within Australian government bonds, while remaining cautious on duration risk in global treasuries.
Our portfolios are positioned to limit downside capture in volatile periods while still participating in recoveries. This risk-aware posture reflects the unpredictable fiscal and geopolitical environment and is supported by our systematic analysis, which currently favours undervalued, reform-driven regions and factors.
As always, we are monitoring macro, market, and portfolio developments closely and will continue to adjust positions as opportunities evolve.
Quarterly market update | Q2 2025