Notably, this current US equities recovery is being driven primarily by domestic retail investors while gains in global stocks are due in large part to institutional investors diversifying their portfolios and risks from very overweight US positions. This divergence is not surprising. Most retail investors tend to prioritise rewards over risks and investing in US equities, “buy the dip”, has been a hugely rewarding trade for years. Large funds, on the other hand, typically take a more balanced view, taking into consideration valuations, micro-macroeconomics and geopolitics in their investing decisions.
Overweight US equities was a “no brainer” in the past 15 years, post-global financial crisis, underpinned by the relative strength and longevity of the US economic expansion (ignoring the short Covid-19 pandemic recession), and corporate earnings that were driven by robust demand growth and the high-margin technology sector. The rise of Big Tech, in particular, was instrumental as these companies expanded globally, at scale, generating huge cash flows that were reinvested including in R&D, which further drove innovation, margins and growth. The other major — indeed, for about half of this period, the biggest — factor driving US market outperformance has been valuation expansion, which reflects, to some degree, the strong corporate earnings growth and rising liquidity as US tech companies attracted global capital. Between 2010 and 2024, cumulative returns on the Standard & Poor’s 500 index were more than double that of the MSCI ACWI (MSCI All Country World Index comprising developed and emerging market stocks). The risk-reward balance has now shifted, at least in the short term, because of increased uncertainties and weaker US dollar due to tariffs and trade, deglobalisation, rising US debts, intensive investments into artificial intelligence (AI) infrastructure, slowing growth for the Magnificent 7 and so on. Hence, the noticeable rebalancing in portfolio funds — out of the US and into global markets. The key question for investors is, have US stocks peaked in this current cycle? Will the diversification trend persist or reverse to once again favour US assets? What is the outlook for the rest of the year, for the global economy and equity markets?
Global economic slowdown is inevitable
We believe the global economy will downshift over the next 12 months, even if the risks of a recession have fallen with the reciprocal tariff pause and trade truce between the US and China. The world and especially the US have been growing for a long period of time (since 2010 and interrupted only by the short pandemic-event recession) in the benign environment of rising global trade and falling inflation, and easy monetary and expansionary fiscal policies.
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Indeed, a slowdown was already in the making as the world’s two largest economies started to decouple in earnest, the result of their intensifying tech war. It is now inevitable, after Trump unleashed a trade war on the world, friends and foes alike. Higher tariffs and reciprocal tariffs, export restrictions — both the US and China are increasingly using export restrictions as weapons of trade, including for advanced chips, hardware and software, rare earth minerals and magnets — and disrupted trade flows, accelerating deglobalisation and broken supply chains plus all the accompanying uncertainties must hurt confidence, investments and consumption. The cost of doing business will rise, which means profits will fall and possibly job losses to follow. We have not seen significant effects yet in hard economic data. But they will come.
The extent and duration of the slowdown will very much depend on what happens after the 90-day pause — July 8 for the world and Aug 11 for China — the terms of the deals and the eventual tariff rates. We think the baseline 10% tariffs for all countries will stay in place, even if most of the reciprocal tariffs are to be rolled back. Trump needs the additional revenue to help push through his big, beautiful tax cut and spending bill. The same goes for higher sector-related tariffs, steel and aluminium currently at 50%, autos and parts 25%, and possibly even expanded to include pharmaceuticals and semiconductor, among others. China may end up with higher-than-baseline tariffs, now at 30% including a 20% fentanyl-related tariff. The same could apply for Canada and Mexico.
The World Bank in its June Global Economic Prospects report cut global economic growth to 2.3% this year, down from 2.8% in 2024 and lower than the projected growth of 2.7% made in January 2025. It also downgraded growth estimates for the US from 2.3% to 1.4%, a big decline from 2.8% growth in 2024 (see Chart 2). Economic slowdown aside, we also foresee some divergence between the US and the rest of the world over the coming months.
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World: Weaker demand, lower inflation, easing monetary policy and fiscal stimulus
Slower economic growth means weaker loan demand and consumer spending and, thus, greater downward pressure on prices, margins and profits. Downward price pressures will be exacerbated by persistent excess production capacity in China, made worse by its sluggish domestic consumption.
Some Chinese producers have sought to circumvent tariffs by selling to the US market via Asean countries such as Vietnam, Indonesia and Thailand — either by way of transhipment or shifting some end processes to these countries (to meet requirements as country of origin). Recent Chinese data shows a sharp drop in year-on-year (y-o-y) exports to the US but corresponding big spikes to Asean. US import data offered collaborative evidence — big drop in y-o-y Chinese imports and significantly higher imports from Asean. But inevitably, cheap Chinese goods previously destined for the US market will flood global markets, including via cost-efficient cross-border platforms like Temu and Shein.
Steep price discounting will threaten the profitability of domestic producers and retailers. Worse, if these countries cannot negotiate US tariffs lower — Asean has been targeted for some of the highest levels of tariffs — domestic exporters will face a double whammy. Small and medium enterprises (SME), which are also the single largest employer group in most countries including Malaysia, are particularly at risk. It could lead to job losses that further hurt economic growth.
Weaker domestic economies and China’s exported deflation will lead to softer inflation worldwide. And this will allow central banks to cut interest rates to support growth. In fact, a global easing cycle is underway. The European Central Bank (ECB) made another cut to all three policy rates in early June to the lowest in more than two years after inflation in May fell to 1.9% (below its 2% target). The focus has clearly shifted to the sluggish economy and prospects of more trade disruptions and weaker exports. Other central banks are also on the same path, including the Bank of England, Bank of Korea and Reserve Bank of India. This is the reason why we think it is time for Bank Negara Malaysia to follow suit, given the clear signs of a broad-based economic slowdown and disappointing corporate earnings results in 1Q2025. Corporate Malaysia is being pressured by both falling sales and margins. Small businesses are also facing rising costs of doing business. We will write more on this in the near future.
In addition to easing monetary policy, countries will also be looking to support domestic growth with Keynesian fiscal stimulus (though this is more difficult for countries that have spent heavily during the pandemic and are struggling with high debts). For instance, Germany recently loosened its stringent debt rules and is planning to spend €500 billion ($750.4 billion) over 12 years, on public infrastructure, climate projects and defence, to generate domestic growth. The European Commission unveiled the “Readiness 2030” (previously “ReArm Europe”) initiative in March 2025 that could bolster defence spending by member countries by up to €800 billion through various measures including national fiscal flexibility and a new €150 billion fund. The objective is to build a more robust and unified European defence (reducing dependency on the increasingly unpredictable US security umbrella), pool procurement to improve interoperability, prioritise European-made equipment and strengthen an integrated defence technological and industrial base.
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China has been rolling out its own efforts to revive its ailing property market, which represents the bulk of household wealth, including lowering interest rates and reserve requirements for banks, providing cheap state funds for buyers to make down payments, financing schemes to help developers and so on. Also various measures to boost domestic consumption such as trade-in subsidies for consumer electronics and cars. Positively, there are early signs of property demand and price stabilisation in Tier 1 cities. Though excess supply persists in lower-tier cities, the property market decline is expected to taper off in the coming months. Consumption will strengthen, we believe, even if it may take a bit more time.
US: Weaker growth, higher relative inflation and interest rates, worries over high debts
As explained above, economic growth will slow and weaker demand will pressure prices lower. However, for the US, this will be offset by higher costs due to tariffs. For instance, US domestic prices for steel and aluminium have risen this year, on the back of the 25% and subsequently 50% tariffs on imports. This will raise costs and prices across sectors, from automobiles to building materials, household appliances and canned food and beverage packaging.
We have yet to see much impact on headline inflation numbers — the latest May annual PCE (personal consumption expenditures) price index came in at 2.3%, up marginally from April’s 2.2% reading, while core PCE (excluding food and energy) was 2.7%. The figures remained relatively muted. This could be due to previous stocking up, before the higher tariffs came into effect. Some may prioritise market share gains at the expense of profits. Part of the tariff costs could be borne by foreign sellers, particularly in the short term. Businesses are also cautious of raising prices amid indications of consumer pullback, preferring to adopt a “wait and see” stance. But many will likely start to pass on the higher costs over the next few months. On balance, we think prices and, therefore, inflation will be higher for longer relative to the rest of the world.
Hence, while the world will counter the economic slowdown by lowering interest rates, the US Federal Reserve has a more difficult task. It will hold off on rate cuts. The Fed has reasons to be cautious. The eventual tariff rates remain unclear and US dollar weakness will add to import costs. Meanwhile the Trump administration’s aggressive drive to round up illegal migrants could also lead to shortages and wage pressures in certain sectors. The Fed’s latest June projections saw an upward revision for PCE inflation to 3% from a 2.7% estimate made in March 2025. We think the tariff-related price impact is likely short term. However, the Fed needs to ensure that inflation expectations remain firmly anchored and tariff-driven price increases do not trigger an out of control wage-price spiral. With the labour market showing resilience, the Fed has bought some time before it has to make a decision. Current market consensus expects the next interest rate cut in September, and likely another in December, in line with the Fed’s projections for two rate cuts later this year.
Keeping interest rates higher for longer, however, comes with a cost. The US has run budget deficits for years but rising debt levels were manageable due to low and falling interest rates. But with interest rates now likely to remain well above levels that prevailed in the past decade, the debts and debt servicing costs are quickly becoming a major source of worry for investors. Case in point, despite relatively higher interest rates, the US dollar has been depreciating against a basket of major currencies so far this year. We think this trend is unlikely to see a major reversal in the near term.
Trump’s One Big Beautiful Bill of tax cuts and spending threatens to add at least US$3.3 trillion to federal government debts over the next decade, according to the latest projections by the Congressional Budget Office. If passed, it means that the supply of Treasury will keep growing larger to fund fiscal deficits and service mounting debts — at a time when concerns about global appetite for Treasury is also growing, amid heightened uncertainties over US domestic, trade and foreign policies, and their impact. Plus, the willingness of the US to weaponise the US dollar in geopolitical conflicts would surely have hastened other central banks’ diversification of their reserves away from the greenback. The Trump administration is betting that the AI boom will boost GDP growth to 3% per annum over the next decade to offset the additional spending and tax cuts, essentially generating sufficient productivity gains to lower the debt-to-GDP ratio. The magnitude of the potential AI-boost to GDP, however, remains hugely uncertain at this point.
The Treasury yield curve has steepened for the reasons above and more (which we have covered in-depth in previous articles and will not repeat here). Thus, when the Fed does cut interest rates — later this year or in 2026 — it may not necessarily lower yields, or at least not in matching degree, for the longer duration bonds, including the 10-year benchmark yields. Worse, it could cause yields to rise, if the bond market believes rate cuts were premature and will lead to higher inflationary expectations, which can be self-fulfilling.
Our portfolio strategy: Diversification
Over the past few weeks, we have written about the individual stocks that are currently in our global Tong’s Absolute Returns Portfolio. Currently, we have four US-based stocks, three Chinese consumer tech stocks and one Chinese biotech exchange-traded fund (ETF) listed on the Stock Exchange of Hong Kong (SEHK), one gold-backed ETF and cash. It should be pretty obvious by this point our near-medium term strategy behind the portfolio’s current composition and why we made the choices we did.
While it is our intention to keep the portfolio fully invested at all times, the magnitude of prevailing uncertainties and risks justifies a more defensive positioning, at least for now. Thus, we decided to raise our cash holding to about 22% of total portfolio value presently. We expect there will be more clarity on Trump’s tariffs, trade deals and fiscal budget in the coming weeks, and possibly renewed volatility in the bond and equity markets. As we said before, investing is about risk-adjusted returns, not taking excessive risks and focusing solely on maximising returns. The gold ETF is, of course, a safe haven asset, which typically has low correlation with bonds and equities. Gold, as we have written before, has rallied hard in the last year and a half, and could have limited upside in the short term barring a major crisis.
We remain deeply convinced that the future winners will be enterprises that embrace AI and advanced technologies in their businesses to raise productivity and drive innovation, and strengthen competitive advantages. The US and China are the two clear leaders in the global tech race (and we will elaborate more on this subject in a future article). This is why we still believe that over the longer term, the US will attract more than its fair share of global capital and US equities will do well, led by those early AI adopters. Hence, even as we diversified the portfolio, we retained an exposure to US-based stocks with a long-term view.
That said, short-term risks are elevated — and valuations are comparatively high reflecting upbeat investor expectations, rendering US equities vulnerable to negative developments (see table). For instance, if yields were to rise further or tariffs end up at much higher levels or corporate earnings growth were revised lower on weaker-than-expected GDP growth. Valuations would surely compress if earnings growth falters. A weaker US dollar will also make US assets less attractive.
At the same time, we think there are significant tailwinds for Chinese stocks. As mentioned above, global investors are diversifying their portfolios — with capital flowing into major developed European and Asian markets and select emerging markets. The SEHK, the preferred gateway to Chinese companies for many, will be a major beneficiary of this revival in interests from global funds. There already is evidence of a rejuvenated IPO market. Importantly, there is a pipeline of Chinese tech stock IPOs and secondary listings — such as the recent listing of CATL, the world’s largest battery manufacturer for electric vehicles — as well as secondary listings for those currently listed in the US, the likes of NIO, Li Auto and Xpeng.
One of the biggest draws of the US market — for both global investors and enterprises seeking listings — is the presence of high-growth tech stocks. The SEHK would be a worthy rival in this respect, with the growing option of quality Chinese tech, biotech and related stocks. Of note, while the SEHK is more accessible than mainland Chinese stock exchanges for foreign investors, particularly retail investors, the Hong Kong-listed entities will gain less from a strengthening renminbi. So, it is preferable to buy the Chinese-listed companies directly where possible.
China’s property market is expected to stabilise soon, and domestic consumption will expand, as will corporate earnings growth and outlook. Importantly, average valuation for the Hang Seng Index is currently less than half that of the Standard & Poor’s 500 index, with forward PE multiples below 11 times. Valuation expansion, supported by improving investor sentiment and confidence as well as global capital inflows on the back of portfolio diversifications, suggests substantial upside potential — after a long period of underperformance.
Our portfolio currently has no Japanese or European stocks. Japanese equities have performed very well in the last few years, driven by increased shareholder activism and corporate governance reforms, and could continue to attract capital flows with more portfolio diversification, including repatriation of US investments by domestic funds. On the other hand, interest rates are already very low and with rising inflationary pressures, the Bank of Japan is more likely to raise than cut rates, likely in 2026. On the other hand, valuations — at 20 times forward PE — are also high, relative to projected earnings growth and the rest of the world.
European stocks too have seen strong renewed interests from global investors, underpinned by expectations of increased Germany infrastructure spending as well as defence expenditure. However, we think underlying economic growth for the euro bloc is still sluggish and the embracing of technology continues to lag far behind the US and China. This will hamper future competitiveness and growth potential. The average PE valuation for the Euro Stoxx 50 is estimated at 15 times forward earnings, lower than US and Japanese equities, though higher than Chinese stocks. Plus, returns would be further bolstered by currency gains, if the US dollar continues to weaken.
The Absolute Returns Portfolio fell 0.5% for the week ended July 2, paring total portfolio returns since inception to 26.1%. The top gainers were Goldman Sachs (+6.9%), JP Morgan (+2.8%) and SPDR Gold MiniShares Trust (+0.7%). On the other hand, Alibaba (-5.3%), Tencent (-2.1%) and ChinaAMC Hang Seng Biotech ETF (-1.9%) were among the biggest losing stocks.
The AI portfolio too ended in the red last week, down 0.4%. Total portfolio returns since inception now stand at -1.7%. The biggest gainers were Cadence Design (+4.5%), Datadog (+3.7%) and Intuit (+2.1%) while the top losers were RoboSense (-7.2%), Alibaba (-5.3%) and Horizon Robotics (-5.2%).
The Malaysian portfolio performed better, gaining 0.1% for the week. United Plantations (+1.3%) and Kim Loong Resources (+0.9%) traded higher while Insas Bhd – Warrants C (-20.0%) continued to lose ground. Last week’s gains lifted total portfolio returns to 183.6% since inception. This portfolio is outperforming the benchmark FBM KLCI, which is down 15.3% over the same period, by a long, long way.
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.
