Global capital markets have seen a noticeable shift in expectations this year. Although backward-looking economic fundamentals still look solid – unemployment is low, inflation has moderated and corporate fundamentals are generally strong – investors are feeling more cautious. The optimism that peaked following the US election has given way to concerns over downside risks to growth. Markets have responded to this shift with equities struggling, credit spreads widening and Treasury yields falling.

Entering 2025, investors expected pro-growth policies (deregulation and tax cuts) to take centre stage. Instead, the focus has been on tariffs and tighter immigration policies – both of which could weigh on growth. The US Federal Reserve (Fed) has also acknowledged that risks are skewing to the downside.

As investors grapple with these challenges, fixed income has regained its traditional role as an effective portfolio diversifier. In this environment, a focus on high-quality bonds and selective credit exposure is essential.

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