Investors urged to adjust to “fragmented new world order”: Fidelity

Yasmine Raso

Senior Journalist, Financial Newswire

30 June 2025

Fidelity International’s mid-year investment outlook has cautioned investors to prepare for market volatility for the rest of the year and adjust their allocations to better accommodate a “fragmented new world order”.

The report, titled ‘A Global Rewiring’, highlighted the investment manager’s top positions for investors to shield from market downsides looking ahead for the remainder of the year, including:

• “Globally diversified portfolios: regional allocation will be more important as US assets experience heightened volatility.
• Hard currency and local currency emerging market (EM) bonds: these stand to gain from a weak US dollar. Many are very cheap. Some, including Brazilian and Mexican bonds, boast attractive yields.
• The euro and Japanese yen: these currencies should prove relatively stable and provide some of the defensive qualities lost from a turbulent dollar.
• EM equities: the rally in China is better supported by fundamentals than on previous occasions. Valuations are relatively cheap. China, India, and Latin America provide pockets of interest.
• Gold: likely to play its traditional role as a preserver of value as the dollar depreciates.”

“We’re entering a phase where traditional safe havens like US assets can no longer shoulder global portfolios. Investors must actively rewire their allocations in line with structural shifts in geopolitics, inflation dynamics, and trade,” Henk-Jan Rikkerink, Global Head of Multi Asset, Real Estate, and Systematic at Fidelity International, said.

“Tariffs, trade deals, tantrums: the first six months of this year have shown us how quickly narratives can change. We are closely monitoring current events in the Middle East and expect more market volatility in what remains of 2025.

“However, it is the deep-seated fragmentation of the global order started by recent policy shifts that will matter most to long-term investors. The US is pushing for reliable allies in supply chains, while China is being pressured to orientate away from supply-side stimulus toward domestic consumption.

“A managed decoupling between both countries in strategic sectors will push trade and capital flows along new geostrategic lines.

“Effective tariff rates currently stand at around 14 per cent. This is likely to increase inflation in the US, to around 3.5 per cent this year. We believe there is a 40 per cent probability that this materialises as economic reflation, and a 40 per cent probability of stagflation (where prices rise even as growth falls).

“Meanwhile, foreign-produced goods will compete to find a home elsewhere as demand diminishes in the US. This should result in deflation in the rest of the world. Rising tariffs and volatile trade policy will likely bring US growth down to around 1 per cent this year.”

“All this leaves the US Federal Reserve with a difficult balance to strike. We believe tariff relaxation and persistently sticky inflation mean the Fed is unlikely to cut rates this year (contrary to market expectations). But so long as the tariff picture remains unclear, so does the outlook for monetary policy. Given the stagflationary risks in the US, investors will now look to alternative shores for growth hedges.”

Rikkerink said the concurrent efforts of the Trump administration to revive America’s domestic manufacturing industry and lower national debt through tariffs and the Chinese government’s focus on supporting domestic consumption will eventually result in a “fragmentation of the world’s economic, technological and security order, as both pursue more isolationist policy”.

“One likely consequence of these changes is a potential rebalancing of US assets in investors’ portfolios. The US dollar is most obviously at risk, given its status as global reserve currency has fed into the twin deficits that Trump is now trying to reduce,” he said.

“The effectiveness of the US dollar as a hedge to equity risk is also coming under question, building on today’s dollar depreciation as foreign investors lift hedge ratios.

“Diversification has always been important: now it is imperative for portfolios that have become increasingly reliant on US assets over the past 25 years. Capital outflows and a dollar depreciation mean index weightings will look very different in the future. Those who get ahead of these structural trends may stand to benefit as portfolios rebalance.

“The euro could prove a significant beneficiary from the repatriation of flows, while newly expansive German fiscal policy signals the potential for a revival of the region. The valuation and defensive characteristics of the Japanese yen also make this currency appealing, while gold should continue to respond well to any further geopolitical ruptures.

“Emerging markets (EM) are attractive. Debt will be buoyed by dollar depreciation – some countries such as Brazil and Mexico already offer very attractive yields. EM equities look relatively cheap. The market is underpinned by Chinese stocks, which have turned a corner following Artificial Intelligence breakthroughs in the country.”

In line with the rising demand among Australian investors in particular for private markets strategies as an effective portfolio diversifier, Rikkerink also highlighted the diversification potential for private assets including real estate.

“That’s particularly useful given their long-term investment horizon and active ownership in many strategies, providing investors with the ability to make adjustments to evolving market dynamics. Likewise, investors may find alternative opportunities in real estate, especially through higher income yielding European markets which can protect against inflation, and through the value-add of ‘greening’ previously unsustainable buildings.        

“And there is still room in a diversified portfolio for US equities. The S&P 500 comprises many of the world’s biggest and most innovative companies, which are highly profitable and shareholder friendly. It would be unwise to bet against the US entirely; but equally it is not the only game in town.

 “Fiscal policy also supports the case for portfolio rebalancing. It is impossible to ignore the US debt burden, and the country shows no sign of stabilising its trajectory. It is running wartime-level deficits at a time when the unemployment rate is at cyclical lows. High volumes of treasury issuance paired with today’s volatility are creating a risk premium on long-term debt, as the imbalances between supply and demand become more prominent. This further erodes the appeal of US Treasuries as a safe haven and strengthens the case for diversification elsewhere.”