Heightened geopolitical uncertainty, volatile trade policy and a softening macroeconomic backdrop are weighing on global growth halfway through 2025. In its latest midyear outlook, Capital Group warns that investors should brace for more turbulence, but also outlines long-term opportunities amid the dislocation.
“A lack of clarity over US trade policy — with rising tariffs at the centre of the storm — has delivered a severe shock to the global economy,” Capital Group notes. “For the first time since 2022, US gross domestic product (GDP) in the first quarter declined.”
This policy-driven slowdown is causing ripples across the global economy. Companies are delaying capital expenditure, hiring has slowed, and cargo volumes at major ports have plummeted. In many cases, firms have suspended earnings guidance entirely, reflecting the level of uncertainty.
“Many companies are hitting the pause button because they don’t know what the rules are going to be a week, a month or a year from now,” says economist Darrell Spence. “Even if some tariffs are ultimately lowered or rescinded, this pause effect is going to have an impact. Whether that pushes us into a recession or not remains an open question, but it raises the risk significantly.”
Global growth forecasts have already been revised lower, including for the US, eurozone, Japan and key emerging markets, according to the latest International Monetary Fund estimates. The policy fog is also affecting sentiment and asset prices. The Bloomberg US Economic Policy Uncertainty Index has surged to levels not seen since the pandemic, Capital Group notes.
Markets are now recalibrating expectations for central banks, particularly the US Federal Reserve. At its June meeting, the Fed extended its pause on rate cuts, citing the need for more clarity on the policy and inflation outlook. However, Capital Group expects the next move is more likely to be a cut, not a hike.
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“We still see a high bar for rate hikes even in an environment of higher inflationary pressures,”says Capital Group.
Europe’s outlook is similarly uncertain, though the fiscal pivot in Germany — with new infrastructure and defence spending — could provide a medium-term lift. In the near term, however, trade frictions remain a drag. “Uncertainty around the level of growth combined with a stronger euro is likely to curb inflation in the region,” Capital Group says. “This, we believe, should make it easier for the European Central Bank (ECB) to cut rates.”
Equity markets have been roiled, but volatility may also be creating compelling entry points. “Trump’s first term shows the outcome can vary significantly from the initial headlines,” said portfolio manager Martin Jacobs. “I view the dislocation as an opportunity to invest in great companies and multiyear investment trends where I have conviction.”
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Capital Group sees dividend growers as one potential source of stability in uncertain times. These companies that are often found in utilities, telecoms and financials have historically outperformed the broader market with lower volatility.
“With global trade evolving, we may be in for a bumpy road,” says equity portfolio manager Steve Watson. “Consistent dividend growth signals a company’s managers are disciplined at capital allocation and confident about future business prospects.”
Examples highlighted include CenterPoint Energy in the US, KPN in the Netherlands, and Canadian insurer Intact Financial — all of which have maintained or grown dividends consistently over time.
Market sell-offs, especially those driven by short-term headlines, can also create opportunities in quality stocks. Chris Buchbinder, another portfolio manager, pointed to Royal Caribbean as an example. The cruise line lost over 80% of its value during the pandemic, only to rebound more than 1,000% over five years.
“With travel and leisure activities halted, cruise lines like Royal Caribbean were priced as if no one would ever book passage again,” says Buchbinder. “This turned out be an excellent investment opportunity for those who recognised that global travel would one day bounce back.”
In 2025, healthcare companies focused on GLP-1 weight loss treatments and semiconductor firms supporting AI infrastructure are among the areas Buchbinder is watching. “The key when great companies go on sale is you have to be prepared to weather some anxiety near term,” he added.
Multinational companies, often viewed as most vulnerable to trade wars, are responding by going “multi-local”, a shift in strategy that localises production and operations in key markets.
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“Many multinationals are developing a ‘multi-local’ approach to business, moving closer to customers in the countries where they operate,” says equity portfolio manager Jody Jonsson. “They are finding ways to adapt and succeed regardless of the environment.”
German industrial giant Siemens opened a US$190 million plant in Texas this year, while Apple has committed US$500 billion to expand US-based manufacturing over the next four years. “We’ve also seen that globally diversified, multinational companies have the flexibility, resources and management expertise to compete very effectively, even when the ground is shifting beneath their feet,” Jonsson adds.
Elsewhere, Japan is emerging as a beneficiary of the changing trade dynamics. The country’s commitment to free trade, along with low average tariff rates, is positioning it as a leader in bilateral and regional trade agreements. Over 87% of Japan’s trade is now conducted with countries where it has an Economic Partnership Agreement (EPA) or Free Trade Agreement (FTA) in place.
“Japanese companies have announced about US$1 trillion of investment in the US, and I expect more in the coming months,” says economist Anne Vandenabeele. She also warned that prolonged US tariffs, particularly on Japanese autos, could pose a risk to Japan’s reflation narrative, though she remains positive on the long-term trajectory.
China, despite being at the centre of many trade disputes, has been one of the strongest equity markets so far this year. Authorities in Beijing are pivoting towards domestic consumption, cutting interest rates and offering subsidies on consumer trade-in schemes. The government is also pushing innovation and entrepreneurship, with AI firm DeepSeek gaining traction as a low-cost competitor to US models.
“This AI breakthrough is a timely reminder that world-class innovation is not solely the domain of the US tech giants,” Capital Group said.
For long-term investors, the message is clear: volatility may persist, but dislocation can be an opportunity.
