The State of Investing
and The Economy

The current state of global financial markets is characterized by significant uncertainty, driven by numerous factors from escalating trade tensions to the challenges faced by central banks in navigating this volatile landscape. The back-and-forth messaging by the U.S. administration has accentuated swings across asset classes.

While this has created widespread market dislocations, a multitude of opportunities exist, particularly within emerging markets (EM), and investors must be agile, resilient and embrace the volatility. High carry trades, valuation overshoots, and shifts in relative sectors present interesting investments. There will be more openings in private credit and special situations as volatile EM capital flows exert pressure on local currencies and lead to higher borrowing costs and less domestic access.

A feature of EM is the enormous variation in asset quality. That is why an active, strategic approach to EMD is even more crucial right now in order to capture returns. Targeted opportunities in select assets, loans in U.S. dollars and hard, uncorrelated collateral, can mitigate downside risk from macro shocks. When it comes to geography, we see opportunity in Latin America and Asia, with investment grade allocations rather than high yield preferable in the current environment.

From a broader, macro standpoint, there has been a paradigm shift. Politics is now increasingly driving economics, thereby reinforcing volatility as the base case. So what lies ahead?

There are two competing narratives regarding the future economic outlook. The optimistic one anticipates a path towards a fairer global trading system, through creative destruction, with the U.S. securing concessions from its trading partners and potentially benefiting from looser monetary policy and tax cuts. This could enhance the productivity promise of exciting innovations in artificial intelligence, robotics, life sciences and more.

The pessimistic view suggests that protracted negotiations, retaliatory tariffs, and constraints on the Fed’s ability to lower interest rates due to inflationary pressures will lead to further economic disappointments. Last week, the critical U.S. Treasuries segment seemed to get remarkably close to the line that separates unusual volatility from market malfunctioning, where buyers and sellers cannot find a price to transact. Also in this view, countries would accelerate diversification away from the U.S., and the country could see erosion of its longstanding safe haven status.

Add to this the interaction with deregulation and the so-called Department of Government Efficiency agendas, as well as the predicament faced by the Fed. Recent downward revisions to U.S. economic growth forecasts, coupled with upward revisions of inflation and unemployment projections by major Wall Street firms, create a policy dilemma. The Fed must now decide whether to combat potential unemployment by cutting rates or to address inflationary pressures by maintaining rates – or raising them.

So far, the business community’s response reflects this uncertainty. A “wait-and-see” approach prevails in the short term, with companies exploring cost-cutting measures to address tariff-related expenses and the risk of lower revenues due to decreased consumer demand. Longer-term perspectives are diverse, ranging from widespread restructuring to potential fragmentation of industries.

Rather than waiting for clarity and hoping for mean reversion, investors must accept that they now operate in a global economy on a bumpy journey to an uncertain destination. Leaning into this new landscape, instead of shying away from it, is key to success. Continuing to carefully select securities and skillfully structure deals is vital, as is keeping the eventual, attractive destination in long-term sight.