As we move through the midway point of 2025, after a frankly dizzying six months when it has felt like the world has been running on fast forward, it is a good time to take stock. In this article the Shares team, drawing on expert opinion, looks to cut through the noise and judge where we sit now and the possible scenarios which could play out over the remainder of the year.

While it is important to have a sense of the market backdrop it’s equally important to remember these factors are entirely out of your control as an investor. You need to focus on what you can control. If you don’t already have an investment plan then you should create one and write it down.

Determine your investment goals, the amount of risk you are prepared to take to achieve them and what time frame you are investing over. Once you’ve got your plan in place or, if you have one already, then you need to stick to it. Maintaining this discipline isn’t easy but it is crucial if you want to be successful as an investor.

A STEP CHANGE IN GEOPOLITICAL RISKS

Geopolitics has been to the fore in the first half of 2025 and there is little reason to think that won’t be the case for the remainder of the year too. The approach to foreign policy taken by the new US administration has prompted a big shift in European thinking and driven countries to unveil plans to ramp up their military budgets.

And, as we discuss elsewhere, tariffs have raised the prospect of a fully blown trade war, with China’s testy relationship with the US and the rest of the Western world and the thorny question of Taiwan bubbling away in the background.

There are otherwise two key flashpoints which are in particular focus right now. The war in Ukraine and the simmering conflict in the Middle East.

As Janus Henderson CEO Ali Dibadj says: ‘Geopolitical risk must be factored into investment decisions, new developments must be actively monitored, and a thorough testing of previously unlikely scenarios is now obligatory.’

The key question in Ukraine is whether the war will continue to grind on in the way it has done for much of the three-and-a-bit years since Russia invaded or whether there is progress towards some sort of peace deal.

The two sides held face-to-face talks in Istanbul on 16 May and 2 June which resulted in prisoner exchanges. However, there is reportedly no date currently set for the next round of discussions and the ceasefire which Ukraine and its Western allies are pushing for has not showed any sign of materialising yet.

Israel’s surprise strikes on Iran which started in mid-June have led to an exchange of fire between the two sides and the conflict took a new and potentially significant twist with the intervention of the US in bombing Iranian nuclear facilities on 21 June.

The extent to which this set back Iran’s efforts to develop nuclear weapons is a matter of debate. However, a relatively modest military response from Iran to US involvement, launching a pre-warned attack on an American base in Qatar, and a US-brokered ceasefire seem to have dialled down the temperature for now.

The two key market barometers for geopolitical risks are likely to be gold and oil. Gold’s traditional safe haven qualities look set to be in demand if either of these conflicts were to hot up.

Both also have a direct impact on energy markets. The key risk factor in the Middle East is if Iran were to make any attempt to obstruct the Strait of Hormuz, through which 20% of global oil and 20% of the world’s liquefied natural gas passes. Any threat to this waterway could quickly lead to a renewed surge in energy prices.

JPMorgan has signalled that in a worst-case scenario, where the production and supply of oil from the Persian Gulf is affected, crude could trade at $130 per barrel.

But if the ceasefire holds, then the weak fundamentals for the oil price, with an uncertain economic backdrop hitting demand and producers’ cartel OPEC+ ramping up supply, would once again dictate prices.

Equally, if some sort of peace is achieved in Ukraine then that would also potentially act as a drag on crude as Russian barrels return to the global market. [TS]

WILL WE SEE A FULLY-BLOWN  TRADE WAR?

Governments have been expanding tariffs, subsidies, and industrial policies since last year, reshaping trade flows and putting serious pressure on global supply chains. Such moves might provide short-term wins for populist politics but this ongoing realignment is contributing to increased uncertainty, which doesn’t make investing any easier.

‘Rising protectionism (policies favouring domestic industries through tariffs or restrictions), particularly in advanced economies, is triggering retaliatory measures (countermeasures from trading partners in response to trade restrictions) and adding trade barriers’, says the UN’s Trade & Development team, while also risking ‘competition distortion’ across multiple industries, like clean energy, technology and critical raw materials.

Yet recent trade noises offer hope for optimism, with talks between the US and China apparently confirming their London agreement on rare earth and tech, while the White House said Trump’s trade deadlines in July could be extended.

Trump’s July 8/9th deadlines for restarting tariffs are ‘not critical’, White House press secretary Karoline Leavitt said. If that line holds it would remove one of the major risks for markets. 

At the same time, the UK’s trade prospects have been lifted by securing a free trade agreement with India, establishing the US/UK Economic Prosperity Deal, and the new Strategic Partnership with the EU. ‘This moment of rapid change is a challenging context to undertake the types of forecasting found in the Global Trade Outlook, but it is also exactly the moment that calls for the far-sighted policy analysis it offers’, said the UK’s Department for Business & Trade in its June 2025 outlook.

In a world of little certainty, what investors can expect through the rest of 2025 and beyond is that change will continue to reshape how businesses and nations interact, with trade corridors between likeminded nations likely to become increasingly valuable, according to consultancy McKinsey.

Its research predicts global trade will grow by around $12 trillion by 2035 in a baseline scenario, or roughly 35% to $45 trillion, but McKinsey stresses that other less encouraging scenarios could also play out, tilting global trade growth by $1 trillion higher or lower, and a worst case ‘fragmentation scenario’, in which geopolitically distant economies trade less, about $3 trillion of it could be lost.

For some time now economists, fund managers and other experts have been pondering whether president Trump was not quite the reactionary he often appears. The theory ran that the world’s most powerful man would bang his stick loud and hard to make sure all major actors were paying attention, before slowly softening the White House’s stance to become more accommodating to trade partners. This seems to be shakily playing out.

Yet huge risks remain. From 9 July, countries without a bilateral trade deal with the US will face ‘Liberation Day’ tariffs which are much higher than the current baseline 10% level. Running parallel to this China has a truce running through to mid-August on much higher tariffs. 

Ultimately, pressure is on for countries, particularly the EU, Korea, India and Japan, to secure agreements by 9 July. The European Union is planning to retaliate even if the US imposes only the 10% baseline levy on its goods. This implies a chance of re-escalation that would lead to further uncertainty which the markets would not like. 

Other questions are still to be answered, India for example. Trump wants the US to become less reliant on China for many goods and India is seen as a more favourable trading partner – Apple (AAPL:NASDAQ) is among the many large cap firms moving iPhone manufacturing from China to India, for example – but while India undoubtedly has the people power, does it have the infrastructure needed to pick up the manufacturing slack?

As things stand, markets seem to be assuming Trump extends these deadlines again, but that could be a misplaced sense of confidence. Countries in ‘productive’ talks could see the deadline extended, but that leaves many more who could face the US unilaterally setting a tariff rate. The EU negotiations are going to be key. [SF]

WILL WE SEE A RECESSION?

Donald Trump’s tariffs and geopolitical turbulence were defining factors for global markets in the first half of 2025, leaving investors fretting over a likely pullback in US economic growth as tariffs raise costs for American corporates and consumers alike. At the midpoint of 2025, the world’s biggest economy faces myriad uncertainties including the possibility Trump’s levies raise inflation and his ‘big beautiful’ tax and spending bill increases the federal debt.

Cracks have emerged in the US labour market, yet they haven’t widened enough to force the US Federal Reserve to cut rates. Indeed, the latest Summary of Economic Projections, also known as the ‘dot plot’, saw the median dot still pointing to 50 basis points of cuts by year-end, but seven officials now expect no cuts this year, up from four at the March meeting.

Julius Baer sees an ‘elevated risk of a recession looming on the horizon’, but its analysts stress any downturn would be unlikely to be long-lasting because the US economy is not plagued by major domestic imbalances.

Seema Shah, chief global strategist at Principal Asset Management, says trade tensions have undoubtedly taken a toll, with escalating tariff uncertainty delaying corporate investment, freezing hiring plans and weighing on both business and consumer sentiment.

‘And yet, despite this, the US economy has so far avoided recession, supported by the continued resilience of household and corporate balance sheets as well as the lingering momentum from a strong first quarter,’ observes Shah.

Principal Asset Management’s base case remains for the US to ‘narrowly’ avoid recession as the economy navigates persistent policy uncertainty. ‘Encouragingly, this forecast was intact even before the US-China trade truce was announced in early May, as we assumed that the US administration would recognize the risks and back away from the economic ledge,’ adds Shah.

Many analysts have argued the Fed should focus on the full employment side of its mandate and restart rate cuts immediately. ‘Yet, with both large and small businesses indicating that they plan to hold onto their workers and ride out the tariff storm, only a modest weakening in the jobs market is likely, further reducing the urgency for Fed support,’ explains Shah, who expects the Fed to wait until Q4 before reducing policy rates.

Uncle Sam’s unpredictable politics have created a ripple effect which is impacting trade and fiscal policies worldwide and the OECD recently reduced its global economic growth forecast to 2.9% for both 2025 and 2026, down from a 3.3% increase in 2024.

‘The global economy has shifted from a period of resilient growth and declining inflation to a more uncertain path,’ notes OECD Secretary-General Mathias Cormann. ‘Our latest economic outlook shows that today’s policy uncertainty is weakening trade and investment, diminishing consumer and business confidence and curbing growth  prospects.’

Shane O’Neill, head of interest rates at Validus Risk Management, believes the UK is emblematic of the broader global story: ‘Inflation is easing, just not quickly enough; growth is cooling, but not conclusively; policymakers are threading a needle in choppy seas,’ says O’Neill. [JC]

INTEREST RATES, THE DOLLAR AND US DEBT

Amid increased geopolitical tensions and an unresolved tariff situation, it is perhaps unsurprising the Federal Reserve left interest rates unchanged for the fourth time in a row on 18 June.

The decision maintains the central bank’s key lending rate at around 4.3% where it has resided for the last six months, despite calls from president Trump to lower interest rates.

The problem for the Fed is that inflation remains above its 2% target with May’s reading coming in at 2.4%. Prices could rise in the months ahead as tariffs take effect, although no such impacts have yet appeared, suggesting companies may have absorbed them so far.

Fed chair Jerome Powell freely admits ‘that process is very hard to predict which is why we think the appropriate thing is to hold where we are,’ commented Powell at the press meeting following the rate decision.

The latest summary of economic projections, also released on 18 June, showed committee members believe inflation will average 3.1% in 2025, up from 2.7% in March, accompanied by a tenth of a percentage point rise in the unemployment rate to 4.5%.

The median projection for the fed funds rate was held at 3.9% corresponding to a target range of 3.75% to 4%, implying a half a percentage point cut by year end.

According to the CME Fedwatch tool, futures prices imply a two thirds chance of a 25-basis point cut in September and a coinflip for another cut by year end.

Economists at Julius Baer believe the Fed is likely to move slowly given the potential for tariff-induced inflationary impacts and forecasts two 50-basis-point rate cuts in the second half of the year.

‘However, companies are adopting a wait-and-see approach, putting investment and hiring plans on hold until the dust settles, which is softening the US growth outlook,’ caveats the bank.

With the European Union cutting interest rates more aggressively that the US, the dollar might ordinarily be expected to benefit from a widening interest spread.

Similarly, the dollar usually strengthens when geopolitical tensions rise, so it is noteworthy the greenback recently dropped to a 44-month low against the euro.

Analysts at Morgan Stanley and Goldman Sachs said it was noteworthy that when markets sank on ‘Liberation Day’, the expected demand for US dollars was relatively muted, while demand for yen and the euro increased.

Some economists believe we are witnessing a major shift in capital flows as investors allocate away from the US, potentially putting the dollar’s haven status into question.

Guneet Dhingra, head of interest rate strategy at BNP Paribas (BNP:EPA) said in an interview: ‘Our view at BNP is that there is definitely a fair bit of cross-border flow, particularly from the US to Europe.’

In summary, the market seems comfortable with the idea of further dollar weakness going into the second half.

Rising US debts and persistent budget deficits remain a focus for investors and were cited as key reasons supporting the decision by credit rating agency Moody’s (MCO:NYSE) to remove the US’s triple A rating.

The US budget deficit remains stubbornly high at 6.5% of GDP, one of the highest outside of recessions and world wars, while the labour market is close to full employment.

In 2024, for the first time in its history the US spent more servicing its debts, roughly $880 billion than it spent on the military ($850 billion). An increasing number of high-profile investors believe the situation is unsustainable.

For example, Doubleline Capital CEO Jeffrey Gundlack has warned of a ‘reckoning for US debt, which, he believes has become ‘untenable’ and may lead investors to move out of dollar-based assets.

Jamie Dimon, head of JPMorgan Chase (JPM:NYSE), has also warned the bond market will ‘crack’ if the government doesn’t get a grip on the deficit. [MG]

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