Invesco favours broad diversification across geographies and asset classes given continued uncertainty and the potential for further surprises.
David Chao, global market strategist, Asia Pacific at Invesco said: “The current market environment is an opportunity for investors to diversify their portfolios across regions and asset classes, as well as to reduce concentrations.”
“As an exceptional run for US stocks may be coming to an end, major developed and emerging markets including Europe, Japan and China see an improving macro picture,”
The asset manager’s mid-year outlook’s base case is that US domestic policy volatility is likely to persist for the remainder of 2025. US-China trading relations are expected to gradually improve, and these combined effects are likely to cause a mild slowdown, yet the extension of tax cuts and deregulation might provide tailwinds for the trajectory of the US economy.
Within equities, Invesco prefers low volatility, quality, and high dividend factors within the US while limiting exposure to mega-cap names. Non-US equities are expected to outperform through the remainder of the year, led by European and Asian equities. Supportive policy in China should drive economic growth and benefit investors overweighting Chinese equities.
In fixed income, Invesco backs ex-US bonds, including local currency emerging market bonds. A slight underweight across most credit sectors and a cautious approach to portfolio risk-taking is supported.
Meanwhile, “elevated downside growth risks, high equity valuations, and benign capital markets activity support a neutral stance on risk for alternative assets”. The outlook generally leans defensive in this area, preferring private credit and hedged strategies over private equity.
Among major currencies, “a widespread reallocation away from US assets could cause a weakening of the US dollar”, which favours major developed currencies such as the euro and the sterling.
However, “given the uncertainty surrounding the base case, the outlook incorporates a range of alternative outcomes”.
Alternative scenarios
In a downside scenario, there is risk that US policy triggers reciprocal tariffs from other nations and limited deals are negotiated. This could result in geopolitical tensions escalating further with imports to the US falling significantly.
“In this case, a US recession is likely, and global growth slows down significantly as tariffs push up prices” according to the outlook.
Preferred assets would include non-US low volatility and defensive equities, non-US sovereign debt, gold, and ‘safe haven’ currencies such as the Japanese yen and Swiss franc.
On the other hand, an upside scenario could occur where the US engages in a policy pivot, tempering tariff and immigration policy while focusing more on pro-growth policies.
“In this scenario, a more ‘risk-on’ positioning is preferred, favoring small- and mid-cap value equities, US bonds, private and real estate equity, industrial commodities, the US dollar, and ‘commodity currencies’ such as the Canadian and Australian dollar, concluded Invesco.
