Navigating Policy Shifts and Sector Rotations

The first quarter of 2025 has been marked by significant market volatility, driven by shifting rate expectations, tariff policy uncertainties, and sector rotations. Rather than a single dominant global theme, Q1 has showcased a story of rotation and repricing across geographies, sectors, and investor expectations.

Policy Uncertainty and Earnings Outlook

Looking ahead to Q2, several key factors are expected to shape market dynamics:

Earnings Reports: Major earnings reports, especially from tech and consumer giants, will be crucial in setting the market tone and determining whether the current rotation continues. Markets are already undergoing a healthy correction, and it’s critical to see if earnings guidance supports this rotation. If results from sectors like financials, industrials, and consumer names hold up, it would validate the idea that the average stock can continue to catch up.
Trade Policy: The lack of clarity around scope and timing of the new tariff policy continues to weigh on business decisions. Supply chains and input prices remain at risk, and this uncertainty may hold back capital expenditure decisions in the near term. The challenge is the “known unknowns” – we don’t yet have visibility into sector targeting or implementation timing. Export-reliant sectors, like autos, retail, and consumer electronics, remain vulnerable, while domestic-focused industries and defense may benefit.
Central Bank Policies: Central banks are in a holding pattern. After months of anticipation, there is now a synchronized pause in the rate-cutting cycle, led by the Fed but echoed by the ECB and the BoE. Policymakers are essentially waiting to see how inflation and growth will play out. This pause doesn’t mean rate cuts are off the table, but it does mean that the pace and timing are highly data-dependent. For markets, this creates potential volatility around every CPI and labor market release.
Tech and AI: Tech and AI continue to be key drivers of equity performance, but the market is becoming more selective. Several of the “Magnificent 7” names have come under pressure this year as valuations reset and the bar for execution rises. While semiconductors have held up well, supported by AI infrastructure demand, there is softness in consumer tech and hardware, where monetization of AI remains slower. The focus will shift to proof over promise – who is actually monetizing AI, not just building hype, driving tangible margin improvement.
Cryptocurrency: Crypto remains in play, especially with the institutional narrative still intact. However, regulatory clarity is a major overhang. The market is also watching how rate expectations shift, as crypto has become increasingly sensitive to monetary policy, especially in the post-ETF approval era.

Regional Equity Outlook

Europe: Europe’s rally has been one of the standout stories in the first quarter of 2025. The Euro Stoxx 600 and broader regional indices have outperformed the US. year-to-date. What’s supporting the move is a more investor-friendly policy mix. The ECB is easing, fiscal constraints have loosened – especially in Germany – and valuations remain compelling compared to US markets. The announcement of a massive defense and infrastructure plan from Germany was a major catalyst, particularly for aerospace and defense stocks, which rallied hard on the news. However, now that the plan is official, we could see a “buy the rumor, sell the news” phase set in, where markets pause to reassess whether actual earnings growth can justify the price move.
China: Chinese equities continue to look compelling. Valuations are at 65% of US counterparts. We’re seeing renewed government support, with high-level engagement from leaders signaling a more market-friendly stance. For long-term investors, this remains an area of interest, even as geopolitical risks persist.

Asset Allocation Strategy

Our 2025 outlook continues to support a pro-risk, yet diversified approach to asset allocation with selective hedging against market volatility.

Let’s start with the backdrop: we’re looking at moderate global growth, moderate inflation environment, and lower interest rates – a combination that typically benefits risk assets. Sectors tied to liquidity and rate sensitivity – like commodities, gold, and certain equities, and even crypto, may benefit. Don’t forget that there’s still a lot of cash on the sidelines, and as central banks pause and ease, that capital is gradually being put to work.

In terms of regional equity views, we maintain a pro-risk bias with a tilt toward developed markets: we like Europe, and US value. We also favor mid and small caps, especially domestic, cash-generating sectors. We’re seeing early signs of broadening in equity performance – beyond the mega-cap names – and this is particularly important because we believe services in general are insulated from tariff-related uncertainty, and financials and healthcare may lead in a moderate growth moderate inflation environment.

Chinese equities continue to look compelling – valuations are at 65% of U.S. counterparts. we’re seeing renewed government support, with high-level engagement from leaders and they are signaling a more market-friendly stance. For long-term investors, this remains an area of interest, even as geopolitical risks persist.

One of the core themes this year is a shift from pure cyclicals to structural winners. We’re moving into a phase where fiscal support, and national security policy start to shape market leadership. That includes themes like infrastructure, defense, homebuilding, and manufacturing. These are not just tactical trades, they’re becoming part of the long-term positioning in portfolios.

Lastly, in fixed income, cash is losing its edge. We favor US treasuries over cash, especially in the belly of the curve. And inflation- protected bonds remain relevant as a hedge against any resurgence in inflation.

So overall, it’s a constructive setup, but success in 2025 will come down to selectivity. This is not a market to chase beta. It’s a market to be thoughtful, diversified, and focused on where policy, pricing power, and structural momentum intersect.

In a market where growth feels uneven and volatility is high, dividends can provide a sense of stability. They’re essentially a way to earn a steady stream of income while you ride out the ups and downs of the market. Instead of relying solely on stock prices to generate returns, dividends offer consistent cash flow, which can be reinvested or used as income – and over time, that makes a meaningful difference.

Some markets are much more dividend-focused than others. For example, the UK’s FTSE 100 index offers an average dividend yield of about 3.6%, which is significantly higher than what you’d find in markets like the US, where companies often prioritize stock buybacks or reinvesting in growth. That income becomes especially valuable in slower growth environments, where capital gains may take longer to materialize.

What’s often underestimated is how much compounding dividends contribute to long-term returns. Historically, reinvested dividends have accounted for a large share of total equity returns – especially during periods of market stagnation or turbulence.

So, for retail investors thinking long-term, dividends can serve two important roles: they reduce reliance on market timing and they build wealth steadily. You’re essentially getting paid to wait – and that’s a smart position to be in when the broader outlook is uncertain.

Tariff Policy and Views on Sectoral Outlook

The lack of clarity around scope and timing of the new tariff policy continues to weigh on business decisions. Supply chains and input prices remain at risk, and this uncertainty may hold back capital expenditure decisions in the near term. The challenge is the “known unknowns” – we don’t yet have visibility into sector targeting or implementation timing. Export-reliant sectors, like autos, retail, and consumer electronics, remain vulnerable, while domestic-focused industries and defense may benefit.

Industrials and autos are especially vulnerable. Companies like Ford, GM, Volkswagen, and Stellantis have deep cross-border supply chains, and even small changes in tariff policy can disrupt production or squeeze margins.

Retail and consumer goods could also be hit, especially names like Walmart, Target, and others heavily reliant on imports from Asia and Mexico. Higher import costs may not be fully passed on to consumers, creating pressure on earnings.

We’re also watching tech, particularly companies like Apple, Dell, and HP, which have significant manufacturing exposure in China. Any escalation there could raise costs and delay production timelines.

Meanwhile, European luxury brands like LVMH and Kering face demand risks, especially if tariffs hit their US or China-facing sales.

So broadly, we see goods-producing sectors more at risk, while services-oriented sectors are likely to be more insulated. From an allocation perspective, this reinforces our tilt toward domestic, cash-generating businesses, particularly in services, financials, and infrastructure.

So in short, Q2 will be driven by how markets digest policy clarity, validate earnings resilience, and position around sector rotations. There’s still a lot of noise, but underneath it, we’re seeing constructive signals that support a pro-risk stance, if you’re selective.