New market trends have been gaining momentum in 2025. While the past two years featured the domination of growth over value and the US over Europe, Q1 has seen the exact opposite. This rotation tests our investment processes and reminds us of the value of active investing. Right now, the risks of mounting uncertainty, notably in the US, demand more resilient portfolios. However, this caution doesn’t signify expectations of a US recession, and we still see value in European stocks. These are interesting times, but also critical moments for our active investment DNA.
In this article, we delve into these three themes.
1. Uncertainty entails greater portfolio resilience
Current market conditions are becoming increasingly challenging for investors, particularly because of their concentration in US equities. Since the surge in long-term rates in the summer of 2022, holding growth stocks has been a better investment than value stocks, and exposure to US assets has beaten investing in European ones. However, so far in 2025, Europe has dominated the US, and value has outperformed growth.
“This rotation tests our investment processes and reminds us of the value of active investing”.
One can attribute the decline in US growth values to investors disengaging from these markets. The motives for doing so are plentiful: high valuations, uncertainty stemming from the Trump administration, and better economic prospects outside of the US.
It is not yet clear if the equity downturn will continue, but the current rotation is expected to be sustained in 2025. As a result, we have adopted a more cautious position, seeking sources of resilience in our portfolios, using bonds as a source of diversification and adding defensive equities where needed. We view this globally reduced market exposure as a sign of caution, not defensiveness.
FIG 1. Growth and value performance (left) and investors' sentiment vs US growth stocks performance (right)1
Read also: The rotation out of US equities outweighs tariff risks, so far
2. Will the US slowdown become a recession?
The Trump administration is using two distinct tools to implement its economic policy. First, easing the US dependence on public spending through the Department of Government Efficiency (DOGE). Second, using trade tariffs to compel foreign companies to invest on US soil, while also generating additional fiscal revenues. This approach carries a growth cost, which is difficult to assess – it could lead to a slowdown, or even a recession.
This situation is similar to what China experienced when it decided to restructure its economy from an export-led system to one based on consumption and service in 2021. When imposing such changes, GDP growth typically reaches lower levels, creating growth scares (see Figure 2).
Whether a recession will emerge or not is an important question, as it will make a significant difference in terms of equity price-earnings (P/E) ratios. Recessions typically come with an average P/E of 16, which is below the current level of 21 for the S&P 500 Index. Thus, a US recession stemming from this repositioning of the US economy is probably the number one market risk right now.
FIG 2. China's real GDP growth over the 2012-2024 period (left) and P/E ratio as a function of economic conditions in the US (right)2
Read also: Is DeepSeek unique? What China’s generative AI breakthroughs mean for equity investors
3. European assets have room to go
Conversely, macroeconomic data in the eurozone is showing progress. This momentum likely stems from the rate cuts implemented by the European Central Bank (ECB) and is consistent with a nominal recovery – probably contributing to the greater attractiveness of European stocks.
Despite the strong start to the year, European stock valuations are still in the region of ‘10’, meaning they are not a cap to further progression. However, we are cautious about smaller companies due to the higher risk they carry, their exposure to rates through floating-rate funding structures and their ongoing lower performance.
A risk to the equity recovery lies on the rates side. First, the recovery could result in inflation forcing the ECB to halt interest rate cuts. Second, German and European fiscal expansion programmes have been driving the long end of the curve higher for all, creating a potential ‘cost of capital scare’. Higher funding costs could slow the progression of European stocks.
FIG 3. Macro indicators for the eurozone (left), and European rates and Stoxx 600 P/E ratio (right)3
Our positioning across asset classes
Our long-only teams have generally lowered their market exposure, aiming to make portfolios more resilient to potential surges in risk aversion. They are seeking defensive assets within their respective investment universes or reducing leverage. This should be viewed as a move towards a more neutral stance rather than a sign of bearishness.
Multi asset. The All Roads team has lowered its market exposure to 100%-110%. The allocation to cyclical and hedging assets is close to the strategy’s long-term positioning.
Fixed income. Our Global Fixed Income team holds a preference for investment-grade over high-yield (HY) debt, applying a defensive and selective tilt. In the US, the team favours inflation-protected over nominal Treasuries and is underweight emerging market hard-currency bonds. Our Asia Fixed Income team is focused on defensive HY and is overweight India, commodities and EM HY sovereigns.
Convertible bonds. The team is positive on Europe and China and neutral on the US and Japan. Six key themes for 2025 remain in focus:
- Embrace US growth with optionality: the AI value chain and crypto
- Electrification: defensive sector with new growth potential
- Geopolitics-driven opportunities: China optionality, European defence and US onshoring
- Consumer strength and brand power
- Increased M&A
- Mid-caps, which are transversal across the preceding four themes.
Equities. In the thematic World Brands strategy, the team has rotated to an underweight US and Japan versus overweight Europe and China stance, adding to its US internet positioning on the back of market weakness. Our Swiss Equities team is de-risking by increasing exposure to consumer staples at the expense of financials. The Asia Equities team remains overweight China, focusing on the internet sector, the AI tech supply chain and high dividend-yielding companies. It has an underweight in India, Korea and Taiwan.
To learn more about our All Roads multi-asset strategy, click here.
