Sebastian Mullins, Head of Multi-Asset and Fixed Income, Schroders Australia

Global growth will likely muddle through this year which makes excessive gains in the global equity market unlikely, but vacillating policy will continue to drive short term volatility for international investors.

In the US, economic indicators looking positive as real wage growth continues to remain robust and unemployment remains low. US payrolls continue to improve, albeit with negative revisions, but continue to point to growing private sector job growth while federal government layoffs are being somewhat offset by state and local government hiring. Wage growth is also holding in and will likely remain supported by a reduction in labour supply due to Trump’s immigration policies. Additionally, US bank lending standards continue to improve, potentially providing consumers with another tailwind to growth.

Countering this optimistic outlook, however, is the continued limbo in trade deals. Other than the United Kingdom, who recently signed a trade deal, little progress has occurred elsewhere and the July extension expiry is quickly approaching. Any surprise increase ]tariffs will weigh on real wage growth and profit margins, but for now corporates should be able to pass on higher costs to consumers without denting demand dramatically.

Fiscal policy remains in the spotlight, with the Big Beautiful Bill pushing deficits wider. However, it is unlikely to stimulate growth dramatically: rather, it will help avoid a severe downturn if Trump’s tax cuts are allowed to expire.

War in the Middle East remains a concern. For investors, volatile oil prices could lead to another inflation spike. This is further complicated by timing with the current increased oil supply from Saudi Arabia and other nations.

This likely puts the US Federal Reserve in a bind.  Any tariff or Middle East related shock would push inflation higher, limiting the Federal Reserve’s ability to cut rates meaningfully to stimulate growth. Other central banks will have more capacity to cut rates and use fiscal stimulus to boost growth if needed. However, there is still limited evidence that they need to do much more than the market has already priced in.

While the easing of trade tensions and lower likelihood of a US recession has seen the USD stabilise for now, we believe that US dollar remains vulnerable from continued outflows for US assets over the medium term, as well as foreign investors (who have left a large portion of their equity unhedged) deciding to increase their hedge ratios, in light of the fact that the USD is not acting as a risk diversifier in the current environment. We believe currencies such as the Euro (EUR) and Japanese yen (JPY) will benefit as a consequence.

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