The US economy is finely balanced across growth, recession and stagflation. Faced with these multiple scenarios, we think neutrality is the most appropriate strategy
Chong Jiun Yeh, Chief Investment Officer
Despite ongoing economic risks, such as those stemming from the trade war, we are continuing to see a broad recovery in global equities and good investor confidence.
This may seem counterintuitive but market participants price uncertainty in different ways depending on prevailing conditions. It appears that during this period of ample liquidity, markets are effectively pricing in hope rather than risk, and therefore assigning near-full valuations, even to uncertain assets.
Navigating fundamentals and technicals
But here at UOB Asset Management (UOBAM), we think this environment requires an astute balancing of market fundamentals with technical signals.
From a fundamental perspective, we emphasise a disciplined valuation framework that appropriately discounts for uncertainty. At the same time, technical and quantitative indicators suggest that the current widespread underweight in investor positioning could fuel further market rallies.
As such, our approach for 3Q25 is to strike a careful balance: acknowledging downside risks that may not yet be fully priced in, while remaining open to the potential for continued market strength. Our base case is that the trade war will deescalate as more “deals” are done, but the risk of re-escalation remains significant.
Accordingly, we recommend a neutral stance between growth and defensive assets. Equities may continue to perform well if downside growth scenarios are avoided and investor confidence persists. Meanwhile, safe-haven assets such as fixed income and gold remain attractive - supported by high yields, lower volatility, and ongoing demand for stability.
Here’s a summary of our views.
- Macroeconomy
In broad terms, we see the global outlook underpinned by three macroeconomic scenarios in the US - a rebound back to start of the year levels, slower but sustained growth and higher inflation, or a recession. At the moment, we think all three scenarios are equally weighted. - US inflation
We expect inflation to rise to 3 – 4 percent by the end of 2025. The question is whether this can be contained as a one-off, tariff-induced increase. More worryingly, on-going trade uncertainties could lead to a wage price spiral. - US interest rates
The US Fed is likely to wait most of the year to see how these inflation risks play out. Given this, we expect no more than 1 - 2 cuts by the end of the year, bringing the US terminal rate to 4.0 - 4.25 percent this year. - Global equities
Despite increased uncertainties in the global macro-outlook, there is a positive case to be made for equities. We lean more into Europe and Asia equities and underweight the US. This is because we see the global growth differentials narrowing and expect non-US equity markets to catch up. - US bond yields
We expect UST 10-year bond yields to range between 4.25 - 4.75 percent in 2H 2025. - USD
We see the USD as structurally weak for the coming years, but may have devalued enough for this year. As such, we expect a rangebound to slightly weaker trend in 2H 2025.
Read the full 3Q25 Quarterly Investment Strategy report here.
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