A torrent of executive orders, tariff threats (and enactments), press conferences, and social media posts have marked a frenzied, often baffling first six weeks of the second Trump Administration. Amid this cacophony, "muzzle velocity" may very well be the most important term for investors to keep in mind this month. It describes President Trump's deliberate media strategy to "flood the zone" with a hail of activity to overwhelm media outlets and political rivals and shock them into inaction. Astute investors would do well to recognise this purposeful gambit for what it is, block out the irrelevant noise, and focus on what matters-in other words, skate where the puck is going, not where it is now.
In this month's Core Offerings, we do exactly this. Sticking to our disciplined frameworks helps us to see through the clamour of the day-to-day, extract investment-relevant signals from the noise, and maintain the courage of our convictions. Accordingly, we lay out five key views (including some that are well out-of-consensus) to help investors skate where the 'investment' puck is going, and position their portfolios to manage the risks and take advantage of the opportunities that may arise.
Having closed out two successful trades from our tactical positioning last month (trimming our overweights to Australian equities and Australian bonds), we maintain an unchanged and broadly constructive stance this month. We continue to look to harvest tactical alpha in equities and credit as we work through the 'fog of Trump'.
"The media... can only focus on one thing at a time... all we have to do is flood the zone... but we've got to start with muzzle velocity."
At the end of the day, it remains our firm belief that macro fundamentals-the economy, inflation, fiscal and monetary policy, and corporate earnings-are what ultimately drive financial market returns. This has held true over multiple cycles and economic regimes and should always be an investor's first port of call in considering their portfolios.
On this front, we continue to assess that 'there's little not to like' as far as the macro is concerned. Global activity still looks set to moderate through 2025 to only a modestly below trend pace near 3% (and may start reaccelerating as 2026 comes into view).
Globally, inflation remains on track to gradually moderate toward central bank targets, supporting consumer real income growth and providing further scope for central banks to trim interest rates through the year (a relatively constructive backdrop for markets).
Over the past month, data has revealed an emerging deterioration in US economic exceptional ism, with uncertainty around US federal government spending and job cuts and US trade policy weighing on business activity and consumer sentiment. The US consumer also showed signs of deceleration this month, with weaker retail activity attributable to the impact of weather and the Los Angeles fires. Regional business surveys have pointed to rising uncertainty in the manufacturing sector. That said, US households continue to benefit from historically low levels of household debt, historically high net worth (buoyed by equity and house price appreciation since the pandemic), and still-solid real wages growth.
"Optimism about the coming year slumped... primarily a reflection of increased uncertainty ... in relation to domestic spending cuts and tariffs."
Elsewhere, we are seeing green shoots that may presage the rest of the world’s long-awaited catch-up to the US. In Europe, economic dynamism in southern economies like Italy and Spain may not fully offset the challenges facing Germany and France, but should still provide tactical opportunities to active investors. Longview Economics notes that these southern economies have “undergone painful structural economic adjustments” since 2008, resulting in significant private sector deleveraging and competitive unit labour costs. We are also expecting the European Central Bank (ECB) to deliver more significant rate cuts this year than its US counterpart, providing further support to the region.
In China, despite an ongoing balance sheet recession and property market downturn, two developments have caught our attention. First, the rapid emergence of DeepSeek serves as a reminder that, in its ongoing competition with the US at the pointy end of the artificial intelligence (AI) revolution, Chinese innovation is still alive. Secondly, Chinese President Xi’s meeting with tech leaders, including Alibaba’s Jack Ma in February, may be a sign that authorities recognise the importance of restoring ‘animal spirits’ for China’s recovery. Meanwhile, markets are continuing to await signs that policymakers will finally follow up on their ‘whatever it takes’ moment last September with concrete stimulus programmes.
Japan’s data over the past month has further supported the notion that it is exiting secular stagnation, with a strong Q4 growth report and a further material lift in wages growth.
While near-term policy uncertainty is elevated, underlying US economic fundamentals remain constructive, while the prospect of further rate cuts, fiscal easing, and regulatory relief may support a relative recovery in Europe and China (as Japan continues to exit secular stagnation).
We are of the firm belief that the Trump administration’s overall fiscal strategy will be the fundamental driver of its internal and external actions this year, and investors that are too caught up worrying about individual tariff announcements risk missing the forest for the trees on a dynamic that may prove critical for financial markets in 2025—The US could have more fiscal discipline (relative to expectations) than Australia or the Eurozone.
Core to this counter-consensus notion is the historical reality that tariffs are invariably a tax on the consumer. As such, they should be viewed as part of the toolkit of fiscal policy and will likely interact with Trump’s other key priority this year—the Department of Government Efficiency (DOGE), which we think investors need to take seriously. Indeed, Trump’s efforts to downsize the US government are supported by the American voter, with a recent Ipsos poll showing 61% of respondents supported downsizing the government. Respondents were less supportive of some of the more extreme measures that DOGE has recently taken, but there is no doubting that Trump and adviser Elon Musk are serious about cutting government spending, and they may be able to cut by more than markets are expecting.
Don’t miss the forest for the trees—the US could be more fiscally disciplined (relative to expectations) than Australia or the Eurozone this year…
…as Trump balances tariffs, DOGE, and tax cuts amid a fiscally hawkish Congress.
This is important because Congressional Republicans (as we expected) are already pushing back on Trump’s fiscal campaign promises and spending plans. Given the narrow majority they hold in the House of Representatives, there is a substantive possibility that Trump may struggle to get much more than a simple extension of his 2017 tax cuts through Congress. If he is limited to this (and is potentially pushed to find further fiscal savings to partially offset the tax cuts), the US deficit may be significantly lower than the initial fears that drove the spike up in US yields in the wake of Trump’s election win.
“In short, the direction of US and global financial markets depends on the amount of fiscal tightening required to bring down US interest rates. Can the Trump administration cut fiscal spending just enough to bring down US bond yields but not cause a recession?”
In addition, every dollar of fiscal savings is a dollar that doesn’t need to be raised via tariffs, giving Trump more leeway to utilise his tariff threats as a negotiating tactic to extract concessions from other countries (such as increased foreign direct investment into the US), rather than relying on them for revenue. We appreciate that there are many moving parts to this calculus. Trump will likely pivot between tariffs and DOGE as conditions change, and for certain countries some base level of tariffs can be expected for geo-political purposes. So, investors should remain nimble and alive to potential swings and roundabouts.
Nevertheless, in contrast to Australia’s free-spending Federal and State Governments (particularly with Australia’s federal election due in coming months), we think that investors should not let individual tariff announcements distract them from the bigger picture, which may see the US proving less fiscally profligate than other regions (including Europe).
The investment implications of a relative US fiscal contraction could be substantial, namely:
- downward pressure on US term premia and a near-term peak in bond yields;
- less upward pressure on US inflation from lower-than-expected fiscal spending;
- more leeway for the Federal Reserve to continue easing monetary policy;
- downward pressure on the US dollar from lower relative interest rates; and
- potential downward pressure on the US economy from relative fiscal contraction.
If this plays out, a peak in bond yields, the US dollar, and US relative economic performance point to potential tailwinds for non-US assets.
“We’re in a new era where, by and large, international relations aren’t going to be determined by rules and multi-lateral institutions. They’re going to be determined by ‘strong men’ and deals… and there’s an entry ticket to this conversation... it’s not our soft power or our values… it’s hard power.”
We wrote extensively about our approach to geo-politics in our recent Observation The New Great Game: Investing in a multi-polar world. One of the more immediate realities of this new world order is the return of Realpolitik to international relations. This calls for practical or pragmatic approaches to global affairs as opposed to the moral and ideological considerations more common in a uni-polar environment. We are seeing this play out in real-time with US-Russian talks for a potential ceasefire with Ukraine. From a 1990s globalist viewpoint, it is morally ‘unfair’ that Ukraine and other European nations, that have been affected by this conflict, were excluded from initial talks. But this is the unfortunate reality of an unbalanced multi-polar world without a clearly pre-eminent hegemon willing to enforce a rules-based global system. In the absence of this, power ultimately comes from ‘the barrel of a gun’, without which it is difficult to earn a seat at the table.
Ultimately, we believe that Trump will be more focused on addressing his domestic fiscal priorities than being actively expansionist on the foreign front. The US voters’ longstanding fatigue with the Iraq/Afghanistan wars has not changed and presents a significant constraint to an activist US foreign policy. As such, we think concern around the US annexing Greenland, Panama, or even Canada is overblown.
Rather, we look to two potential positives on the geo-political front. Firstly, a ceasefire in Ukraine (however unfair it may be) will likely prove beneficial for both Ukraine and the broader Eurozone over the longer term. Indeed, the humiliation of exclusion might finally spur Europe to embark on the further fiscal, military, and political integration that it ultimately needs to compete as a great power in today’s world. Indeed, both UK and Germany have made recent steps toward opening their fiscal purses for significantly increased defense spending, likely improving their chances of getting a seat at the table.
And Secondly, another key relationship that straddles both trade and geo-political theatres is the US relationship with China. While investors have increasingly priced an antagonistic, geo-strategic rivalry between the two superpowers, we believe the reality may be more nuanced. Trump has already shown that he is less ideologically driven with regards to China and is more focussed on extracting economic concessions from the Middle Kingdom. He has also flagged the potential for a ‘Grand Deal’ with China, the seeds of which may have already been sown (staying the shut-down of TikTok in the US, multiple “very good” calls with President Xi, and recent comments calling a deal “possible”).
One area that we continue to monitor closely as a potential geo-political tail risk is US relations with Iran. Trump has historically been more antagonistic towards the Islamic Republic, and the regime sits at an important pivot point between Russia, the US, and China. How Trump deals with Iran and its growing uranium stockpile will be a key potential geo-political flashpoint for the investment outlook.
For investors willing to look through the newspaper hysteria around US foreign policy, the investment implications of our view are relatively constructive:
Our central case remains that equity markets will continue to broaden out this year, across regions, sectors, and market-cap categorisations.
Market strategists have been warning about the growing concentration risks in US and global equity markets for the past five years, as the Magnificent 7 continued to make new highs and looked ever more impregnable. The emergence of China’s DeepSeek in January served as a prudent reminder to investors of the risks of betting too much on such a narrow set of companies. Disruption this year will not be contained to just geo-politics.
Indeed, the US equity market was already showing signs of broadening prior to the January spike in yields and recent trade volatility. While near-term risks still remain, our central case is that equity markets will continue to broaden, with the potential for outperformance of equal-weighted S&P 500, mid-cap equities, and potentially small-cap equities vis-à-vis the market-cap weighted S&P 500.
The sheer breadth of potential disruptions coming from the top-down and the bottom-up is likely to result in more volatility and more dispersion… which should present rich hunting grounds for the best active managers to add value to portfolios.
Expanding our view of a broadening equity market, we also believe that the opportunity set for active management to deliver outperformance is as large as it has been since 2008. The sheer breadth of potential disruptions coming from the top-down (e.g. Trump) and the bottom-up (e.g. DeepSeek) is likely to result in more volatility and more dispersion across asset classes, geographies, sectors, and single stock positions.
Such an environment should present rich hunting grounds for the best active managers to differentiate themselves from the rest. The right partnerships will be key in navigating an environment where inputs into modelling will require a more rigorous, nimble and active approach. Deep due diligence will be key to aligning with the highest quality managers.
Diversification is one of the few free lunches in investments and constructing portfolios that are not dependent on a single macro outcome to deliver on objectives through a blend of best-in-class active managers is pivotal.
The first six weeks have seen no shortage of “muzzle velocity” developments. Knowing this is a deliberate strategy to confound Trump’s opponents, we are looking through the noise…
… don’t get distracted, get ahead of the game, monitor risks.
The first six weeks of the second Trump Administration have seen no shortage of “muzzle velocity” developments. Knowing that this is a deliberate strategy to confound Trump’s opponents, we are looking through the noise and focusing on five key views to guide us in the period ahead. Reflecting this, we have made no changes to our tactical asset allocation this month, retaining our constructive overweight to equities (trimmed last month).
While we maintain the courage of our convictions, we are nonetheless not oblivious to the risks to our core views and the potential for macro uncertainty to unduly weigh on business and consumer confidence and damage the global growth outlook near-term. Indeed, greater volatility remains a key element of our secular outlook. A sharper than expected pull-back in global growth – and more sustained drawdown in equity markets – is clearly possible over coming months, and we continue to monitor those risks. However, such an outcome would likely also be disinflationary, opening the way for more aggressive rate cuts, that should relatively expeditiously, provide a ballast to markets.
As discussed in our outlook, we continue to believe that truly diversified portfolios will re-establish their importance during 2025, and look to harvest tactical alpha in equities (staying overweight US and Japanese equities) and credit (favouring carry in a higher-for-longer interest rate environment), while also maintaining conviction in the opportunities for active management to add value this year.
This document has been prepared by LGT Crestone Wealth Management Limited (ABN 50 005 311 937, AFS Licence No. 231127) (LGT Crestone Wealth Management). The information contained in this document is of a general nature and is provided for information purposes only. It is not intended to constitute advice, nor to influence a person in making a decision in relation to any financial product. To the extent that advice is provided in this document, it is general advice only and has been prepared without taking into account your objectives, financial situation or needs (your Personal Circumstances). Before acting on any such general advice, we recommend that you obtain professional advice and consider the appropriateness of the advice having regard to your Personal Circumstances. If the advice relates to the acquisition, or possible acquisition of a financial product, you should obtain and consider a Product Disclosure Statement (PDS) or other disclosure document relating to the financial product before making any decision about whether to acquire it.
Although the information and opinions contained in this document are based on sources we believe to be reliable, to the extent permitted by law, LGT Crestone Wealth Management and its associated entities do not warrant, represent or guarantee, expressly or impliedly, that the information contained in this document is accurate, complete, reliable or current. The information is subject to change without notice and we are under no obligation to update it. Past performance is not a reliable indicator of future performance. If you intend to rely on the information, you should independently verify and assess the accuracy and completeness and obtain professional advice regarding its suitability for your Personal Circumstances.
LGT Crestone Wealth Management, its associated entities, and any of its or their officers, employees and agents (LGT Crestone Group) may receive commissions and distribution fees relating to any financial products referred to in this document. The LGT Crestone Group may also hold, or have held, interests in any such financial products and may at any time make purchases or sales in them as principal or agent. The LGT Crestone Group may have, or may have had in the past, a relationship with the issuers of financial products referred to in this document. To the extent possible, the LGT Crestone Group accepts no liability for any loss or damage relating to any use or reliance on the information in this document.
This document has been authorised for distribution in Australia only. It is intended for the use of LGT Crestone Wealth Management clients and may not be distributed or reproduced without consent. © LGT Crestone Wealth Management Limited 2025.
