View From The Top: Coming up trumps

View from the very top: The Trump Presidency has not been a disaster – quite the opposite. This is a view that many investors are coming to accept, given the strong performance of most asset classes so far in 2025. Trade deals are getting done, a recession any time soon is looking unlikely and corporate confidence is improving. None of this makes for complacency and exuberance in certain, more speculative areas of the market is a cause for concern. Nonetheless, we remain constructive. Project forward and the emphasis may shift to upside delivered from supply-side reform and US interest rates that are likely to trend lower. The path ahead will not be smooth and another correction at some stage in 2025 cannot be ruled out. Stay nimble and opportunistic. Active diversification across asset classes remains the best way to generate long-term returns, in our view.   

Asset Allocation:

• Equities: Markets globally have continued their steep ascent since early April lows. Dip buying has worked so far this year, driven by a perceived fear of missing out as well as a backdrop of resilient fundamentals. Going forward, we believe it makes sense to diversify. This means less abandoning US equity exposure and more seeking to restore balance (across regions and styles – and away from mega-cap tech), especially with a longer-term view in mind. US earnings this quarter have generally surprised to the upside so far, helped by a weaker Dollar, but valuations currently look more compelling elsewhere, especially in emerging markets
• Fixed Income/Credit: US Treasury yields may be lower than at the start of the year, but in any account, the golden age for fixed income (and of low rates) looks to be firmly in the rearview mirror. Don’t bet on further Treasury yield weakness in the near-term. Timing rate cuts can be hard and noise around a ‘shadow Fed’ or similar may have the perverse effect of pushing yields higher. Elevated interest in speculative grade credit speaks of a desire to lock-in rates. Investors should look to own some duration but be generally mindful of the levels of new credit issuance across the spectrum coming.
• Currencies: After the worst start to the year for the US Dollar Index since 2005 in H1, it has not been surprising to see some recent relative Dollar strength, albeit from a very low base. We have consistently argued that currencies tend to mean revert over time. We also note that investors’ most consensual trade across all asset classes is short the Dollar (per Bank of America’s monthly survey). This may be a helpful time to be contrarian.
• Gold: The precious metal remains a core asset for us in any allocation strategy. Global geopolitical instability and policy uncertainty is unlikely to subside meaningfully in the near-term. This provides a form of support for gold as does ongoing Central Bank purchasing, as a way of diversifying beyond conventional currencies. 
• Alternative Assets: Allocations to this asset class can increasingly serve as a form of replacement for fixed income, offering both portfolio diversification and income-generating characteristics. Hard assets can act as a hedge against inflation and fiscal debasement. We favour selective investments, particularly in uncorrelated strategies.

“Coming up trumps” is a British idiom that means to succeed or perform well, often when others might have doubted their ability to do so. The phrase has its origin in card games, where ‘trumps’ are the highest cards that can win any hand. Six months into the most divisive US Presidency in recent times, the phrase seems appropriate. Naysayers have been proven wrong. By contrast, investors who have consistently bought the dip have been rewarded, as have those who pursued active portfolio diversification strategies.

With many assets trading at or near all-time nominal highs, there are signs of exuberance in some segments of the market. We can chart a constructive case for further gains in many asset classes through to the year-end but would caution against complacency. The journey so far in 2025 has been neither smooth nor easy and we expect volatility to remain the norm. Our counsel is to focus on the bigger picture and direction of travel.

Three things matter in this respect. First, the economy looks unlikely to experience a recession in the near-term. If anything, a slowdown has already occurred and is now discounted. Next, there is plentiful liquidity in financial markets. The ~$7tr sitting in money market funds (per Bloomberg) provides a helpful buffer. Meanwhile, the path towards lower US interest rates over the next 6-12 months seems clear. Finally, corporate health remains broadly robust, as evidenced by what we have learned so far in the current reporting season for second-quarter earnings.

In terms of the economy, the threatened downsides of an erratic policy process have yet to materialise. Although the multiple releases of both hard and soft data points have been at times contradictory, the most helpful indicator is to look simply at GDP growth. After the 0.5% contraction experienced by the US economy in Q1 this year, American GDP expanded at a headline rate of 3.0% in Q2 (based on the first reading released on 30 July) and the Atlanta Fed is currently projecting at least a similar pace of expansion for Q3. Notably, the IMF recently upgraded its 2025 and 2026 forecasts for both US and global GDP growth.

Understanding the rate of change is crucial. The much-feared, but never-apparent recession might have manifested itself as a slowdown towards the end of 2024 and at the start of 2025. At this time businesses were understandably destocking inventory ahead of potential tariffs. Many were paralysed and hence in wait-and-see mode at the start of the year. The good news is that businesses and consumers (as well as investors) seem to be looking beyond tariff risks. The latest University of Michigan consumer confidence survey stands at its highest in five months. Meanwhile, corporates are indicating cautious optimism. A weaker Dollar is certainly helping to make America more competitive again.

Two things have changed since the start of the year. Both are interrelated. US President Trump has shown some willingness to compromise. As a result, all market participants have become increasingly desensitised to the President’s rhetoric. Take trade. Deals struck with major trading partners (the UK, Japan, Europe) auger well for other future trade deals elsewhere. Even if the average tariff may now be higher than at the start of the year, their levels are less bad than feared.

With tariff deals being concluded, it is possible to look beyond and see the other dynamics at work that are helping to create an increasingly favourable investment environment. Consider the favourable tax reform already enacted (the Big Beautiful Bill helps preserve lower taxes) as well as energy prices that are lower than at the start of the year. Project further out and the scope for supply side reform and AI productivity benefits should become more apparent. An efficiency-first mindset remains an enduring quality in the US and something that differentiates it from other nations. This is American exceptionalism at work.

In addition to better than feared economic expansion, inflation has surprised to the downside for four of the last six months. It’s important to remember that much of these lower prints are being driven by stable or declining shelter and services prices – neither of which are that exposed to tariffs. Look out one year and consumer estimates for inflation (as measured by the New York Fed) have also started to fall and are now at a manageable 3.0%. Investors can conceivably put their prior fears of stagflation to one side for now.

Against a background of stabilising inflation, the direction of travel for interest rates looks lower, irrespective of how long Fed Chair Powell remains in charge. Forget politics and focus on reality. Current US interest rates of 4.25% are arguably restrictive, inflation is moving towards the Fed’s target  and there is a logic attached to being pre-emptive in the face of any potential labour market weakness.

In any debate, the politicisation of the Federal Reserve (and its role) is not healthy. Sure, investors may have been able to handle tariff threats and polarised policies, but to compromise the independence of the Fed would be a step too far. In our mind, it would undermine the stability of the US economy. Contravening the rule of law could plausibly raise the cost of borrowing (via higher yields) and curb investment. Put another way, there is a major asymmetry attached to the clear costs of, relative to any notional benefits that might arise from removing Chair Powell.

Nonetheless, the possibility of a ‘lame duck’ Fed Chair for the remainder of Jerome Powell’s term – May 2026 – cannot be ruled out. There is already evidence of dissent among the members of the FOMC, based on voting patterns from recent meetings. Project forward, however, and consider the potentially positive combination of a likely dove next heading the Fed with active supply-side reform. Put another way, learning to live with Trump uncertainty can help investors come up trumps.

However, there is no cause for complacency. The threats have not gone away; they have just become less bad. This, of course, may be enough for markets. On tariffs, the lagged effects may still be coming. 40% of CFOs polled by Jefferies say that they intend to pass tariff costs on to consumers, while a trade war remains the leading risk according to investors polled by Bank of America. On rates, there is a scenario where hopes for cuts (under any Fed Chair) may be derailed were inflation to reassert itself before labour market weakness deepened. The apparent ‘K-shaped’ dynamics of the US economy do also bear monitoring – the strength of higher-income consumers is perhaps masking weakness elsewhere in the economy.

Markets always over-react in both directions. Sure, President Trump has enjoyed a winning streak – trade deals in his favour, the passing of a major tax and spend bill, increased defence spending by allies, the neutering of Iran and more – but such a rate of success may not be maintained indefinitely. Be mindful of exuberance, especially in more risky segments. Take the relentless recent rise in crypto currencies, meme stocks and unprofitable tech businesses (as well as the return of the SPAC) as potential warning signs. Dip buying has certainly worked this year. Whether such a strategy will endure remains to be seen. Diversification remains the most tenable long-term investment strategy in our view.

Alex Gunz, Fund Manager, Heptagon Capital