2025 is proving to be a volatile year. U.S. equities have stumbled, declining 3.1% in the week ending March 7, 2025, and posting a year-to-date loss of -5.3% (see Figure 1). Escalating trade tensions, technology sector jitters, and renewed growth concerns have weighed on risk assets. President Trump’s confirmation of 25% tariffs on Mexico and Canada, alongside a doubling of tariffs on China to 20%, has rattled investors. Meanwhile, breakthroughs like China’s DeepSeek chatbot have raised doubts about the valuations of U.S. technology companies, further dragging broader indices lower.

Figure 1: China and European equities have led the pack.

Dynamic Shifts in Tariffs and Technology fronts

Last week, investors grappled with shifting U.S. tariff policies. On March 4, 2025, President Trump imposed 25% tariffs on Canadian and Mexican imports, delaying auto-related tariffs until April. Later, the administration adjusted its stance, delaying tariffs on certain goods and granting additional exemptions under the United States-Mexico-Canada Agreement.

While some see this as the negotiation rhetoric becoming reality, we believe tariffs remain a bargaining tool rather than a fundamental shift in global trade. Nevertheless, markets reacted swiftly, with U.S. equities declining on growth concerns tied to escalating trade tensions.

Calibrating Our Strategy for Resilience

At the start of the year, we anticipated that tariffs would lead to short-term price increases but slow the U.S. economy by 2H 2025, triggering rate moderation benefiting fixed income and Asian equities. With tariffs now in place, we expect U.S. economic deceleration to be faster than anticipated, prompting earlier rate moderation, supporting fixed income and Asian equities from Q2 2025, and potentially strengthening Asian currencies as the U.S. dollar weakens.

While U.S. equities continue to offer long-term potential, we have reduced exposure to growth sectors such as Information Technology, Communication Services, and Consumer Discretionary. This adjustment is based on the expectation that sustained higher interest rates could prompt a rotation into more defensive sectors or regions with more attractive valuations, such as Europe. In response, we have increased exposure to Asia, adding Hong Kong-listed China internet stocks, driven by potential fiscal stimulus and improved sentiment surrounding AI development following the rollout of the DeepSeek model. Additionally, we have increased our allocation to Japan to capitalize on potential economic expansion, supported by rising consumption, investment growth, and ongoing corporate governance reforms that are enhancing profitability and capital efficiency.

We will actively monitor market conditions and implement FX hedging strategies as needed to protect portfolios from currency risks. In fixed income, we are increasing exposure to quality investment-grade credits to enhance stability, provide yield pick-up, and benefit from the economic slowdown. In commodities, we maintain a preference for Gold, supported by government spending, defense investment, and ongoing geopolitical and economic uncertainties.

Balancing Core and Tactical Exposures

Volatility is a natural part of investing. Since 1994, the S&P 500 has delivered positive returns in 80.1% of calendar years, yet intra-year drawdowns remain common. The largest gap between the lowest return and year-end performance reached 51.1% (see Figure 2), underscoring how sharp fluctuations can occur within a single year. While market turbulence can be unsettling, history shows these swings are not derailments but rather opportunities within a long-term investment journey.

Figure 2: Market drawdowns are common in a calendar year.

For investors, the path forward lies in a portfolio that balances risk and reward, anchored by two core exposures:

1. Global Equities: The asset class offers investors with access to leading companies with revenues spanning the globe—think tech giants driving AI innovation or multinational companies with resilient supply chains. Global equities provide diversification and growth potential, making them a cornerstone for long-term wealth creation (see Figure 3).

Figure 3: Global equities have provided capital growth for investors over the years.

2. Malaysia Fixed Income: Malaysian bonds provide decent cushions to downside risks. As evidenced by their relatively low volatility profile (see Figure 4), the asset class helps reduce an investor’s overall portfolio volatility, shield against foreign exchange risks, and offer insulation from external shocks like tariffs or U.S. policy swings. With attractive yields and a resilient domestic economy, local fixed income provides an anchor to portfolio stability in uncertain times.

Figure 4: Malaysia bonds exhibit notably lower volatility profile compared to their US counterparts.

For investors who prefer to leave asset allocation to professional fund managers, global mixed asset portfolios offer a balanced approach—delivering equity-driven growth alongside fixed income stability. By dynamically adjusting allocations based on market conditions, fund managers can navigate shifts and optimise risk and reward for long-term resilience.

Positioning for A Wide Range of Outcomes

Markets are likely to remain choppy as tariff negotiations, rapid AI developments, and key economic data keep investors on edge. Reacting to short-term news flow may lead to whipsaw losses. Therefore, investors should position defensively by increasing allocations to mixed assets and fixed income, which provide stability amid uncertainty, while gradually building into global equities for long-term growth. A well-balanced portfolio can help weather volatility while capturing opportunities.