The recent relative market calm amid ongoing global trade uncertainties presents an opportune moment for investors to reinforce their portfolios. Despite the US-led tariff stalemate that has embroiled the global economy, hopes are high that President Trump may soften his stance and establish trade deals, providing a temporary market relief. Since President Trump imposed steep reciprocal tariffs on April 2 (referred to as “Liberation Day”), US equity market volatility, as measured by the VIX index, spiked to multi-year highs above 50.
Concurrently, volatility in US government bonds, measured by the MOVE index, soared to a two-year high, and the US 10-year government bond yield shot up to nearly 4.6 percent. We believe short-term yield spikes above the 4.0-4.25 percent range present opportunities to tranche into US government bonds. Recent bond market volatility and the dollar’s weakness have led many to question the status of US government bonds as a haven asset.
However, we maintain a near-term upside bias in US long-dated bond yields due to persistent policy uncertainty. Despite China’s significant holdings, it is unlikely to accelerate the sale of its treasury bond holdings. Accordingly, the upside potential for US bond yields seems limited over the next 6-12 months, making current yield levels attractive for long-term investors seeking high-quality investment-grade government bonds.
Gold has been the best-performing asset class this year, surging over 20 percent yearly due to geopolitical uncertainties and a weakening dollar. According to the World Gold Council, this has spurred significant flows into physically backed gold ETFs, totaling $21 billion in the first quarter, marking the second-highest quarterly inflow on record.
The market offers hidden investment opportunities
Asia, significantly affected by US tariffs, contributed 16 percent of this inflow, despite representing only 7 percent of the total assets under management for these ETFs. The strong demand for gold is likely driven by tariff concerns, the dollar’s weakness, and inflationary pressures, particularly affecting Japanese buyers. We expect gold prices to reach new highs of $3,500 per ounce over the coming 12 months, supported by continuous strong central bank buying and prolonged policy uncertainty.
This year’s significant development is the US dollar index’s break below its three-year trading range of 100-110, having plunged 8 percent year to date. This decline concerns many investors who are heavily allocated to US dollar-denominated assets. As the Trump administration seeks to reorganize global trade, investors must diversify geographically and regarding currency exposure.
Fiscal policy support in significant economies, such as the European Union and China, provides pockets of investment opportunities, offsetting US challenges like mounting debt and rising living costs. Thus, balanced allocations into Asia and Europe can help investors participate in regional growth initiatives while hedging against a prolonged US dollar decline. Our asset allocation model suggests a broader diversification into alternative investments, including hedge funds, private equity, private credit, infrastructure, and sports investments.
This strategy is particularly relevant now when stocks and bonds may move similarly under a persistently high inflation regime. Alternative assets offer a historically proven source of uncorrelated returns, helping to moderate portfolio volatility and enhance overall investment returns.