Multi-asset diversification amid risks to growth

US growth concerns gather

It’s been a tumultuous start to the year for macroeconomic conditions, with international trade disputes escalating and questions about the growth outlook. Nonetheless, our outlook for multi-asset funds is, on the whole, positive and our main expectation is for a broad-based recovery outside the US with a substantial dose of risk.  We acknowledge that a weaker growth period in the US is likely, but our indicators are not signalling a recession unless there is a significant slowdown in services.

Read also: Will rate moves threaten US growth?

In the US, our growth nowcasting signals peaked in early February and have been deteriorating since. It's important to note that this isn't catastrophic –41% of US data is still improving. The declining data primarily relates to consumption, which is beginning to falter under the pressure of interest rates, and investment, which is reacting to current uncertainties. Production expectations were holding up until recently, but a decline is now evident in the ISM, indicating a deteriorating environment for economic decision-making. 

In essence, the US economy is experiencing a slowdown, something central bank watchers have been anticipating.

FIG 1. Decomposition of US growth components¹

Since the start of the year, amidst high interest rates and likely influenced by the uncertainty of the ongoing trade war, our signals for both consumption and investment (including capital expenditures and residential investment) have begun to decline. Still, our analysis does not distinguish between service consumption versus goods consumption. While the former appears immune to rate changes, the latter is not. A slowdown in the service industry would suggest that the current US slowdown is indeed meaningful.

FIG 2. Decomposition of our growth nowcasting signal²

What about tariffs and inflation?

The intensifying trade war involving the US could disrupt the global recovery path and is a key source of uncertainty. The perception is simple: if the US imposes tariffs on American imports, these will become more expensive for domestic consumers and businesses, increasing inflation. 

We analysed the impact of tariffs on inflation and growth in our two-part series, looking to historical episodes for guidance. Over the past 125 years, we found that the inflationary effect of tariffs could fast mutate into a recessionary scenario – if tariffs are significant and become reciprocal. We also considered lessons from 2018, a year cited by the Trump administration when tariffs did not cause inflation, which could presumably repeat in 2025. Our research found that for tariffs to generate inflation, they need to be directed at large import categories – this is not what occurred in 2018.

More generally, 2025 has been favourable to multi-asset investors thus far, with most risk premia generating positive returns, thus rewarding diversification. It remains to be seen if this trend can continue in the current context. 

Adjusting to the context

Our All Roads multi-asset strategy adjusts its positioning to a changing risk backdrop according to a rules-based asset-allocation approach. The strategy’s exposure to defensive assets like nominal rates, real rates and long volatility varies to accord with different market conditions; during the inflation shocks of 2022-2023, for example, the strategy reduced allocation to bonds and upped allocation to risk-on assets. The strategy is now moving back towards its historical average, with 55% of the portfolio allocated to protection assets³. 

The All Roads strategy was designed with stability, predictability and liquidity in mind. The strategy’s long-only, systematic approach aims to protect and grow client capital across market cycles, managing risk through a dynamic drawdown management methodology. We continually seek to improve our strategy by taking a scientific, yet pragmatic, approach to research. The strategy has undergone a number of improvements since inception, including new volatility methodologies, tail risk hedging and the integration of new overlays in areas such as valuation and short-term macro. 

Read also: Will US concentration fade in 2025?

Keeping an eye on tail risk

Across market conditions, multi-asset investors should remain conscious of the potential for tail risk. Extreme loss events are often associated with volatility spells, but they can occur even during periods of relative calm. And though participating in upside is a key focus for most investors, tail-risk mitigation may be even more important over the long term. As Figure 3 shows, for a hypothetical investment in the S&P 500 made in 1990, avoiding the 10 worst trading days for the index would have actually played a larger role in the health of the overall return than participating in the best days. 

FIG 3. Current value of investing USD 1 in the S&P 500 since 1990⁴ 

Read also: Watch your tail risks

The All Roads strategy’s dynamic drawdown methodology systematically de-risks the portfolio in response to market signals and has successfully positioned the portfolio to avoid the six worst trading days of a standard multi-asset benchmark over the last 13 years⁵. 

As 2025 plays out, multi-asset investors should pay as much attention to downside risk as to the upside potential of regional recoveries.