Fiscal

In this Second Quarter Strategy Outlook, we explore the major trends that are set to drive financial markets for the rest of 2025 and beyond.

There is an ongoing regime shift in Indonesia: SOEs will be used to drive economic growth. Bank loans will accelerate, but their profit margins will shrink. Despite higher nominal growth, Indonesian equity prices in US dollar terms will not see a sustainable bull market. Downside risks to currency and upside risks to domestic bond yields have also increased.

European equities have surged on hopes of a low-inflation boom—but the rally has likely gone too far, too fast. With a pullback now likely, how should investors position themselves over the next 3–6 months?

Brazilian policymakers are stuck between a rock and a hard place. There is no combination of fiscal and monetary policies that can assure decent growth, on-target inflation, a stable exchange rate, and public debt sustainability. We recommend investors maintain an underweight allocation to Brazilian fixed-income markets versus their EM peers and continue shorting BRL versus MXN. We have been bearish on the Bovespa in absolute terms and are now downgrading Brazilian stocks from neutral to underweight within an EM equity portfolio.

The South African government seems to believe that some fiscal retrenchment can stabilize the public debt-to-GDP ratio. But that’s a misconception. The country will need draconian spending cuts to achieve this.

Trump’s foreign policy can be explained by rational US interests, but it requires settling the trade war with allies sooner rather than later. Book gains on EUR-USD for now.

Investors should not chase the rally in European defense names any further. Too much good news has been priced in too quickly.

Despite our bearish predisposition towards stocks, we are open-minded to anything that could challenge our thesis. As such, in this report, we review five upside scenarios for equities.