The world is not standing still. The transformative powers of artificial intelligence and other technological innovations are upending both business and social practices. Demographic drivers such as an ageing global population and a rising middle class are challenging existing consumer preferences. Meanwhile, increased migration has empowered populist politics.
Yet, a reshuffling of the world order is moving the dial for change up to warp speed – straining long-standing geopolitical alliances and disrupting established trade patterns.
Ongoing geopolitical, technological, social and environmental shifts will create significant opportunities for investors, but they also present increased uncertainty and form fresh challenges. By combining multiple perspectives, we aim to channel the opportunities catalysed by a more volatile world into long-term sustainable investment returns for our clients.
America First agenda
From the outset, President Trump’s return to the White House has shaken up assumed norms.
From a security perspective, the US administration’s criticism of NATO has compelled other members to raise their own defence contributions, amid fears they can no longer rely on the US for support. Its aggressive economic agenda has resulted in US tariffs now averaging around 18%. This protectionist stance has upended the global trading system, generating high levels of uncertainty for export and import businesses. Many domestic political institutions are also facing intense scrutiny, with the Federal Reserve’s independence and the reliability of US economic data both being called into question.
Collectively, these changes will have consequential and long-lasting implications for investors. Such disruption has the potential to meaningfully impact long-term growth and inflation trends. In addition to generating high levels of market volatility, the frequent ambiguity surrounding US policies risks permanently eroding business and consumer confidence. A trading strategy has also been based on the concept that ‘Trump always chickens out (TACO)1’, where investors seek to capitalise on market declines on the assumption that stocks will recover as polices are either reversed or watered down.
This era of uncertainty is unlikely to come to an end soon. The US administration’s tactic of ‘flooding the zone’ with an unceasing flow of initiatives means investors will need to stay alert.
Wider geopolitical shifts
Doubts about the US’s reliability as a trading and security partner are already having profound global repercussions. Amid high tariffs to deal with, many countries may seek to limit their reliance on the US and establish stronger trading relationships with other powerful nations, such as China.
Furthermore, the need to assume responsibility for its own security has prompted European nations to spend more on defence and infrastructure. Notably, fiscally conservative Germany has reformed its constitutional debt brake to release at least EUR 1 trillion of public expenditure, which should provide a much-needed economic stimulus.
Despite President Trump’s aspiration to be known as a peacemaker, scant progress has been made on achieving a lasting resolution in the Middle East or between Russia and Ukraine. And in the face of US inconsistency on defence, other states may also be emboldened to launch attacks, such as China’s long-held ambition to reclaim Taiwan. Should any of these conflicts escalate, it could lead to a sharp rise in oil prices, with negative consequences for inflation, economic growth and risk assets.
Diverging paths:
Following a prolonged period of US exceptionalism, markets may be starting to diverge down different paths.
Investment flows have been less US-centric of late, with foreign investors selling US assets or buying more foreign assets. This rotation has created a major headwind for the US dollar, which has weakened considerably. If this dollar depreciation is sustained, it could be a positive for emerging market assets, which historically outperform when the dollar is weak.
Shifts in regional asset allocations have also seen investors look more favourably on European assets. The opportunity set in Europe has markedly improved after the continent committed to increased spending and embarked on reform. Inflation also appears to be more contained in Europe than in the US, with the exception of the UK. Having fewer inflation worries could give the European Central Bank greater monetary policy flexibility than the Federal Reserve is likely to have.
While it is not yet clear that the era of there being no alternative to US assets has ended, the opportunity set beyond the world’s biggest economy has broadened for investors.
Refocus on Fixed Income
In light of so much disruption to established norms, markets have become more reactive to newsflow.
The fixed income market has expressed discomfort with the ever-larger public borrowing requirements from the world’s largest economies. So far this century, there have been two catalysts for major fiscal spending: the Global Financial Crisis (GFC) in 2008 and the COVID-19 pandemic in 2020. Yet, rather than steering economies towards a more sustainable fiscal trajectory, many governments are spending more.
Arguably, in Europe, this has been out of necessity, but the ‘One Big Beautiful Bill Act’ could raise the ratio of US debt to GDP even higher with little real justification. While fixed income markets have so far been relatively forgiving, the cost of long-term debt is rising. Investors would be wise to remember the market turmoil generated by the UK’s then Prime Minister Liz Truss in September 2022 – bond markets can dish out fierce and rapid punishment.
While risks certainly remain, market volatility and economic dispersion also create numerous intra- and cross-market opportunities, as well as useful places to hide. Therefore, it might be time to take a fresh look at the defensive and diversifying qualities that fixed income has traditionally offered.
Rethink equities
Although equities are far from immune to turbulence from the changing status quo, they have also shown resilience thanks to several key drivers.
Technology and the Artificial Intelligence (AI) revolution are continuing to propel markets higher. A challenge to US AI dominance by Chinese rival DeepSeek may have initially sparked market jitters, but it also highlighted that these models are becoming cheaper to train and use. And as prices fall, consumption tends to rise. Over the coming years, AI is expected to be embedded across systems, applications and technologies in all parts of the economy as use cases proliferate.
Geopolitical developments have also brought the defence sector back into focus, with autonomy, resilience and security emerging as key investment themes. Not only is the sector a beneficiary of increased government spending, but defence companies help drive innovation in areas such as advanced logistics, cybersecurity and artificial intelligence – all of which can be highly relevant for society as a whole.
Despite the world’s rapidly ageing population and the strain that is placing on healthcare services, the sector has underperformed significantly in recent years. However, this remains an area that offers vital solutions in a transforming world and should remain a focus for investors.
Small capitalisation companies are another area receiving some much-needed investor attention after a long period of neglect. Small caps tend to be more domestically orientated than larger companies and are less exposed to tariffs; Europe’s infrastructure programme and attempts to build more manufacturing capacity in the US should also boost smaller companies.
In an increasingly opaque world, the real opportunity lies in identifying the equity investments that can thrive, regardless of global events. The key is to look ahead and hone in on the companies and sectors harnessing innovation and driving change.
Harnessing market volatility
With a rising number of factors disrupting the established world order, there is always new information to process.
Despite fiscal concerns, a compelling range of fixed income opportunities means these assets serve as a useful diversifier. And with equity markets experiencing more turbulence, it is crucial to identify the investments able to capitalise on volatility cycles and take advantage of market catalysts.
At BNP Paribas Asset Management, we aim to build conviction about what the future holds by combining diverse perspectives with deep research. This enables us to pinpoint investment opportunities for our clients that are resilient enough to withstand short-term volatility and deliver long-term growth.
