CIO Lens Q3 2025: Uncertainty abounds but markets are at new highs – why?
Our investment experts discuss the elevated levels of uncertainty that prevail in financial markets, and how to navigate this by focusing on medium-term trends.
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In this quarter's CIO Lens:
- Johanna Kyrklund, Group Chief Investment Officer, reflects on how the stability of the bond market is key to markets remaining calm amid high levels of policy uncertainty.
- Our multi-asset investment team provide an update on their public market asset allocation views, including why they have broadened their regional equity exposures and continue to prefer gold as a diversifier.
- Nils Rode, Chief Investment Officer, Schroders Capital, discusses how selectivity and diversification remain crucial for tapping into the return and resilience potential of private markets.
- Andy Howard, Global Head of Sustainable Investment, highlights the increasing importance of climate adaptation in securing the resilience of many businesses and investment portfolios.
- The Schroders Economics Group outlines their current baseline forecasts and risk scenarios. Policy uncertainty means risks around the baseline forecast remain high.
Uncertainty abounds, but the bond market holds the key – Johanna Kyrklund, Group Chief Investment Officer
The last few months have been unusual because I've had more questions than ever about where markets are headed, even when I'm walking my dog at the weekend, yet in the end the outcomes have been quite benign. President Trump has been tearing up the economic rulebook, but markets appear to be relatively unperturbed: why?
As I've mentioned before, Trump's policies are symptomatic of a medium-term shift in the political consensus: away from fiscal rectitude to fiscal profligacy, away from globalisation to protectionism and away from zero rates to tighter monetary policy.
One of my favourite books is "Player Piano" by Kurt Vonnegut and in this book one of the characters states: "Without regard for the wishes of men, any machines or techniques or forms of organisation that can economically replace men do replace men. Replacement is not necessarily bad but to do it without regard for the wishes of men is lawlessness".
Western societies have been profoundly disrupted by globalisation and technological innovation. As a result, the average person has not seen an improvement in their living standards. Wage growth was anaemic in the last decade and job insecurity increased. Against this backdrop, a backlash against the liberal consensus and the return of more populist policies is not that surprising.
A shift to a more expansionary fiscal policy in recent years has boosted nominal growth and this continues to support corporate earnings. From this perspective, populist policies can be helpful to equity markets.
The main cloud on the horizon from a growth perspective is clearly uncertainty over tariffs, with a lack of clarity around both final rates and potential carve-outs. President Trump's extension of the trade agreement deadline from 9 July to 1 August has done little to ease tensions, as it has been accompanied by increasingly aggressive rhetoric toward key trading partners.
As noted above, market reactions to renewed tariff threats have become more muted over time, suggesting that investors increasingly treat such announcements as opening bids in a broader negotiation process. While this interpretation has largely proven correct to date, it does introduce the risk that markets may ultimately underestimate his willingness to implement significantly higher tariffs than currently expected.
Our base case remains an effective tariff rate of 12% - the highest level in post-war history but implying that some agreements are reached. This leads us to view the risk of US recession as being low, particularly as the labour market is still solid and energy prices are contained.
All in all, we remain positive on equities but risks are skewed in a stagflationary direction for the US as the lagged effects of tariffs start to impact the economy.
The most significant speed limit on equities, however, is the extent to which bond markets can take the rising debt levels that result from higher government spending. James Carville, political advisor to President Clinton, famously said "I would like to come back as the bond market. You can intimidate everybody".
So far, the Trump administration has paid attention to the bond market and appears to understand the importance of its stability. Inflation expectations are still under control. All in all, the signs are still benign but there are a couple of trends I'm monitoring:
- Firstly, the steepening at the long end of the yield curve. Yields on longer-dated bonds are rising faster than those on shorter-dated bonds, which suggests that concerns about spending are being gradually priced into bond valuations. There is no doubt that the longer end of curves is becoming more volatile.
- Secondly, we have to watch how Trump treats the Federal Reserve (Fed); a credible central bank is essential to a well-functioning bond market and how Fed Chair Powell's succession is handled will be analysed closely.
Given rising debt levels, we continue to see bonds as a helpful source of yield but not a source of diversification. As we have said many times, we favour gold for this.
Lastly, a word on the US dollar. Speaking to clients around the world, I do see evidence of strategic allocations to the US dollar being reviewed. After years of strong US outperformance, starting levels of US dollar exposure are quite high and there is a recognition that some diversification is necessary. However, these shifts will take time. The US dollar still offers unparalleled liquidity and so one should be careful not to over-egg this story.
As always, when confronted by daily headlines, it’s important for investors to stay focused on the medium-term trends. The political consensus has shifted, correlations across asset classes have changed, the companies we invest in are being disrupted but in many ways our job as active managers is the same as ever - researching corporate and country fundamentals, looking at risk from every angle, making decisions under uncertainty, being vigilant but patient in our quest for superior returns.
Public market asset allocation views – Multi-Asset investment team
Equities (+)+
We downgraded our view on equities to neutral at the start of the second quarter in response to “Liberation Day,” as aggressive trade policy worsened the near-term outlook for growth and inflation. The resulting market shock was self-inflicted, and we remained mindful that a policy U-turn could trigger a swift recovery.
Subsequently, a 90-day pause on reciprocal tariffs between the US and China helped de-escalate tensions, reducing the risk of a sudden trade halt and a sharp rise in unemployment. As a result, we believe the risk of recession has diminished. We therefore upgraded equities to a positive stance and maintained this view through the end of the period, despite ongoing volatility in tariff-related news. So far, trade developments since “Liberation Day” have remained broadly consistent with our baseline view. Economic uncertainty persists, and we need to monitor the impact of this uncertainty on corporate behaviour, but some of the downside risks are more limited. We moved away from a concentrated US equity focus, towards a more geographically diverse exposure, adding to regions such as Europe, Japan and emerging markets.
Government bonds (0) 0
We maintained a neutral stance on government bonds throughout the quarter. While valuations improved—particularly after the sharp sell-off in April—concerns around rising US debt levels and persistent inflation limited our conviction. These factors limited the defensive appeal of US Treasuries. In contrast, German Bunds became our preferred exposure as a safe-haven position. Germany’s fiscal situation is expected to stay disciplined, and inflation should remain under control.
Commodities (0) 0
We have held a neutral view on commodities overall. At the start of the quarter, we downgraded our stance to neutral on industrial metals in response to the escalating trade war between the US and China. We have maintained a positive view on gold which has stood out as a preferred diversifier amid fiscal concerns and geopolitical tensions. Conversely, we have held a negative view on energy markets which appear imbalanced due to increasing supply. Although recent geopolitical tensions have triggered a spike in oil prices, we expect prices to eventually decline as incoming supply outweighs demand—assuming the current uncertainty subsides.
Credit (0) 0
We downgraded our view on credit to negative at the start of the second quarter. Policy uncertainty was causing corporations to behave conservatively, and valuations were expensive. This was especially true in the US where we felt that spreads were under-pricing equity market volatility and we expected further widening from current levels. However, towards the end of the quarter, we moved back to neutral. While valuations remain expensive, particularly in the US, the growth outlook is stabilising as cyclical tail risk is abating, and consumer sentiment holds up well.
Source: Schroders Multi-Asset Investment Team, July 2025. Note: + signifies a positive view, 0 signifies neutral, - signifies a negative view, brackets signify the view at the end of last quarter.
Private Markets Investment Outlook Q3 2025: How to navigate uncertainty – Nils Rode, Chief Investment Officer, Schroders Capital
Uncertainty remains the dominant theme for the global economy. Significant US policy changes since the start of the year, especially related to trade tariffs, immigration and defence, continue to present risks that can impact growth, inflation and the path of interest rates.
Additionally, recent accommodative fiscal and budget legislation in the US, UK and continental Europe, while presenting short to mid-term opportunities by potentially supporting growth, has generated concerns over government debt sustainability. Last quarter’s escalation of hostilities in the Middle East, coupled with the ongoing conflict in Ukraine, are additional risk factors.
In the face of these headwinds, the potential of private markets to help investors to navigate prevailing global uncertainty has arguably never been more important for investors.
With a broader private market slowdown in terms of fundraising, new deal activity and exits now into its fourth year, private market valuations and yields are generally attractive in both absolute and relative terms – and there are specific opportunities across private asset classes to boost portfolio diversification, resilience and returns.
We suggest selectivity and diversification to navigate change
Private markets have historically offered some protection against public market volatility and have often thrived amid environments of uncertainty. We have shown this previously in our study on private equity performance during crisis periods over the past 25 years.
We believe that, in the current market environment, there will be some private market strategies that exhibit notably better risk/return profiles than others. Consequently, we urge investors to be particularly discerning in selecting strategies and investments.
Additionally, diversification across private market strategies is important. In a market with heightened idiosyncratic risk related to announcements and policy changes, diversifying risk premia is very beneficial. This can be done by combining strategies that are less correlated, or uncorrelated, to both each other and to listed market alternatives, as well as through strategies and solutions that themselves offer inherent diversification through pooling a variety of exposures.
We see the most attractive allocation options in the current market as being characterised by some or all of the following:
- Balanced capital supply and demand dynamics, leading to favorable entry valuations and yields.
- Domestic companies and assets offering some insulation from geopolitical risks and trade conflicts.
- Opportunities to earn risk premiums arising from complexity, innovation, transformation, or market inefficiencies.
- Robust downside protection through limited leverage or asset backing.
- Reduced correlation with listed markets, owing to distinct risk exposures.
Private equity: Small is beautiful
In private equity, we see a focus on transformative growth, local companies and multi-polar innovation – that is, innovation happening in multiple locations around the world, often complementing each other– as a way to navigate uncertainty.
Specifically, we see small and mid-sized buyouts, GP-led secondaries and early-stage venture capital as strategies that can access these interrelated trends, and are particularly attractive and resilient in the current environment.
Private debt and credit alternatives: Specialised strategies offer attractive yields and diversification
We see attractive opportunities in specialty finance, asset-based lending and real assets debt, each providing access to stable, high income or diversifying cashflows, in many cases capitalising on market inefficiencies as a result of continued volatility and inflation.
From an income diversification perspective, insurance-linked securities (ILS) are attractive for their combination of strong returns and low correlation with traditional markets.
Infrastructure equity: Energy transition remains a key theme to access potential long-term returns
The energy transition segment in infrastructure remains particularly compelling in the current, uncertain macro environment, due to its strong inflation correlation and secure income traits.
We currently see the most attractive opportunities in Asia and Europe, where governments are continuing to strengthen their decarbonisation commitments. In the US, it does appear that the federal tax credit support for renewables will be phased out on a much more rapid timeline, which could initiate a rush of activity to get new plant in the ground.
Real estate: Continued expectations that 2025 will be a strong vintage
We continue to anticipate that 2025 will be a strong vintage year for real estate investment, with opportunities across sectors and geographies.
Tight supply and high construction costs are supporting rental income even as the economic outlook remains clouded by uncertainties, including tariff changes and stagflation risks. Meanwhile transaction volumes across the asset class remain subdued but have stabilised, suggesting a market floor.
Why climate adaptation is crucial for business and portfolio resilience – Andy Howard, Global Head of Sustainable Investment
London Climate Action Week (LCAW) – an annual jamboree of climate-related events, announcements, and gatherings – was surprisingly busy this year. Against a backdrop of political challenges, high-profile exits from industry initiatives and outflows from climate funds, we might have expected a more muted gathering. But as momentum gathered pace over the last couple of months, there were twice as many events during the week as there were hosted last year.
It’s a reminder that while climate investment has faced headwinds, and headlines have become more negative, the underlying picture remains more mixed.
In the US, where President Trump signed executive orders rolling back many federal climate policies, the US Climate Alliance brings together state governors representing over half the US population and economy, focused on “securing America’s net-zero future”.
Across the investment industry, on the one hand the last 12-18 months have seen high profile departures from climate groups, and the Net Zero Asset Manager initiative has suspended many of its activities while it completes a review and consultation over its future strategy. On the other, analysis of the 100 largest asset owners in the world (based on the Thinking Ahead Institute's latest list) shows over 60 have published decarbonisation plans and those strengthening plans over the last 18 months outnumber those weakening them (based on Schroders' analysis of public statements by those asset owners).
Our own commitment to proactively measuring and managing climate risks and opportunities in the portfolios we manage for our clients has not changed. Our commitment is to our clients, and we believe thoughtful climate analysis and proactive action is needed to deliver the outcomes they expect.
The consequences of more frequent and severe physical impacts of climate change are a growing focus for us and many of our clients. The lag between emissions being released and the maximum temperature response is around a decade on average (numerous academic studies examine this relationship including Zickfeld and Herrington), meaning the future has effectively already been written. Growing physical risks seem inevitable and climate adaptation will only become more important to securing the resilience of many businesses and portfolios. As the tangible damage of climate change’s impacts become increasingly stark – over the last five years, the economic costs of climate-related losses reached close to 50% higher than the previous decade – investor attention is increasingly focused on the risks and opportunities that shift presents.
Climate adaptation has received less policy focus than efforts to decarbonise, but there are signs attention is growing. With recent research showing that every $1 invested in adaptation can return over $10 in social benefits, there is a case for increasing support, and with separate research indicating that individual investments can generate average returns of up to 27%, there are opportunities in broadening climate investment to include its inevitable consequences.
Reflecting that, climate adaptation was a central theme during LCAW. Our own research and engagement build on work we have done in this area, including through novel investment strategies such as a fund focused on enhancing the affordability and accessibility of climate insurance.
Scenario analysis from the Schroders Economics Group
Economic and policy uncertainty remains elevated. The uncertain global backdrop and less synchronised economic growth mean that the risks around our baseline forecast remain high.
Baseline
Summary
Our forecasts assume all the tariff pauses become permanent and the additional tariffs on Chinese goods settle at 30%, along with a 10% levy on the rest of the world. US tariffs have settled broadly in line with the assumptions made during our Q1 forecast at about 12%. We have not made significant changes to our forecasts. We expect global growth of 2.2% in 2025 and 2.7% in 2026. In the US, growth is expected to be 1.7% this year, down from 2.5% previously, owing to tariff-related stockpiling but growth is expected to rebound to 2.4% in 2026.
Macro impact
Meanwhile, global inflation is expected to remain broadly unchanged. In the US, inflation is assumed to be 3.1% this year and next owing to greater protectionism by the administration. We still expect the Fed to remain on hold this year but to implement some gradual rate cuts next year. In comparison, we expect one more rate cut this year from the BoE, and thereafter rates will remain unchanged over the forecast period. Over in Europe, better domestic news on the labour market and inflation means that the ECB is now likely to lower rates to 2%.
Reciprocal tariffs
Summary
Reciprocal tariffs are put back on in Q3 this year such that there is 145% tariff on Chinese goods and 20% on European goods as Trump pursues an aggressive industrialisation policy. That lifts the US effective tariff rate to 32.3%. Trading partners respond with retaliatory tariffs.
Macro impact
Deflationary: A freeze in global trade, aggressive cuts in capex and a collapse in confidence result in a global recession. Meanwhile, punitive tariffs cause goods inflation to surge, but price pressures do not last long as weaker growth and lower commodity price, eventually pull inflation down. Against this backdrop, central banks deliver more easing than our baseline forecast.
Art of the deal
Summary
Following negotiations and bilateral deals, the US government lowers additional tariffs to zero for all its trading partners. However, the 25% tariff on steel, aluminium and auto parts is expected to remain in order to protect key industries, meaning that there is a slight increase in the US effective tariff rate to 5.3%.
Macro impact
Reflationary: The removal of additional tariffs improves confidence and spending among US corporates and households. This results in stronger growth in the US and the rest of the world. But this causes price pressures to remain sticky and leads to higher commodity prices. Relative to the baseline, central banks have less room to cut rates in the near term and raise rates in 2026.
Higher defence spending
Summary
Faced with ongoing geopolitical pressures, NATO member countries quickly lift spending on defence to 3% of GDP. UK defence spending rises by 0.5% of GDP, and by 1.3% of GDP in the eurozone.
Macro impact
Reflationary: Increased defence spending results in stronger economic activity, but the benefits are concentrated in Europe. The US receives a slight benefit from faster developed market growth, but higher fiscal spending is assumed to crowd out private sector demand for Chinese goods. Stronger growth and increased commodity prices lead to higher inflation, meaning central banks deliver less rate cuts.
Supply-side boom
Summary
This scenario encompasses supply-side factors, such as lower oil prices, faster adoption of artificial intelligence (AI) and greater global deregulation, which boost efficiency and productivity in the global economy. In particular, the ramp-up of oil production by OPEC and the US leads to prices to fall to $40/bbl.
Macro impact
Productivity boost: Economic growth is boosted by lower energy prices, higher capital expenditure, and efficiency gains from greater deregulation. Inflation also falls back, which enables central banks globally to cut rates more aggressively than the baseline.
Global fiscal crisis
Summary
Trump tries to push through large fiscal stimulus in Q3 2025, which upsets the bond market and leads to a spike in Treasury yields. Contagion pulls yields higher globally. European fiscal policy is also looser as countries such as France and Italy expand government spending.
Macro impact
Deflationary: Higher term premiums across the global economy causes financial conditions to tighten, which reduces household disposable income and corporate capex spending. This results in a decline in growth and inflation, which allows some central banks to cut rates in 2025 and 2026.
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