Asset allocation views: diversifying in uncertain times
Rising geopolitical tensions and policy flip-flops have created a market landscape prone to frequent volatility. In such times, it might be important for investors to seek diversification and remain agile in search of opportunities. We look at the highlights of our latest asset allocation outlook.
Volatile government policy, geopolitical uncertainty, and significant market volatility characterized the first half of 2025. Escalating tariffs and retaliatory measures affected investment decisions, augmented challenges for businesses globally, and raised concerns around their influence on the U.S. economy.
Alongside the domestic and global impact of U.S. tariffs, there has been a shift toward governments globally using fiscal policies as a tool for growth, as monetary policy easing cycles near their end. These developments have brought to light new investment opportunities beyond the United States and highlighted the importance of a diversified investment approach.
Following the sharp market correction in April triggered by tariff announcements, the heightened trade uncertainty has now eased. In this backdrop, we’ve upgraded our 12-month outlook on equities versus fixed income to modestly overweight. We remain cautious of worries around slowing and below-trend global growth, persistent trade policy uncertainties, inflation fears, and elevated valuations.
United States: what’s the outlook?
While key economic indicators in the United States aren’t yet concerning, we believe the full effect of policies might become evident in the second half of the year. Jobs data, for one, has remained steady with nonfarm payrolls increasing by 147,0001 in June. However, the spotlight will be on Q2 GDP data, after the U.S. economy contracted by 0.5% in Q1.
U.S. real GDP declined in Q1 2025
We expect Q2 GDP data to be positive, potentially averting a recession. However, future indicators like housing data and jobless claims might remain subdued. This could prompt the U.S. Federal Reserve to reduce interest rates in the second half of the year, and we anticipate three cuts in our base scenario.
Emerging prospects for diversification
Supportive fiscal and monetary policies in regions beyond the United States, such as Europe, have created a favorable landscape for geographical diversification.
We’ve upgraded U.K. equities to overweight due to their global value orientation and defensive traits. We believe that the country’s service-heavy economy is less vulnerable to tariff-related trade disruptions. Additionally, these equities currently offer attractive valuations, strong dividends, and active buybacks.
In Asia, manufacturing-driven export economies such as South Korea, Singapore, and Taiwan are expected to remain resilient. However, we remain neutral on Chinese and Hong Kong stocks due to a subdued growth outlook. China’s property market challenges persist, and more extensive policy changes may be necessary for a long-term market rebound.
Finally, as traditional assets like equities continue facing potential volatility due to evolving trade policies, commodities offer a valuable means of diversification. Gold, in particular, remains appealing because the fundamental factors supporting its price remain robust. Although gold prices have surged since 2023, we believe there’s still structural potential for further growth.
1 U.S. Bureau of Labor Statistics, as of July 3, 2025.
For more details, read the latest asset allocation views from the Multi-Asset Solutions Team at Manulife Investment Management.
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Important disclosures
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