French asset manager Carmignac shares its insights on the economic outlook for the second half of 2025, highlighting US President Donald Trump’s damaging anti-growth policies, and considering how investors should allocate their assets.

Despite a lot of attention in recent months, Carmignac has highlighted how Europe and emerging markets are still underowned, underappreciated and undervalued, providing a fertile hunting ground for stock pickers.

“The combination of long-lasting fiscal stimulus, monetary easing and attractive valuations as a starting point bodes well for European equity markets,” Kevin Thozet, member of the investment committee at Carmignac, said in a note. “Yet the rise of local currencies can act as a tailwind for some. As such, we combine transactional companies with local-to-local business models, exporting companies with high pricing power and companies exposed to the domestic economy in Europe.” 

In emerging markets, Thozet favours domestic actors operating in underpenetrated sectors – Latin America, e-commerce, and banking stand out.

He emphasised how massive capex in the technology sector is insufficient for matching strong and fast-growing demand for artificial intelligence solutions. This is expected to benefit those companies most exposed to the sector. But the starting-point valuation matters for investment returns. Therefore, Thozet prefers hardware and hyperscalers where valuations are much lower than software. Similar to Chinese actors, they have demonstrated their capacity to turn from a copycat to the leader of the pack.

Other wealth managers such as German asset manager DWS also prefer European over US equities. See more commentary here.

Fixed income
Thozet believes that caution is warranted on sovereign debt markets. “The US budget is built like a French one. Germany is spending like it hasn’t in decades and investors are demanding more for lending over the long term,” he said.

The combination of this fiscal profligacy and a lack of investor appetite for long-term debt means that short-term euro debt is preferred as disinflationary pressure allows the European Central Bank (ECB) to be proactive. Whereas in the US, five-year maturity bonds stand out, given the US Federal Reserve’s reactive status: fewer interest rates cuts over the short term call for more interest cuts over the medium term. “Additionally, as the longer-term inflation risk is still underestimated by markets, real rates are preferred to nominal ones,” Thozet continued.

“Yields in some credit markets offer an island of certainty in a sea of uncertainty. In a scenario where the risk of recession over the short term appears relatively contained on both sides of the Atlantic, the energy and the banking sector look attractive with some carefully selected instruments offering mid to high single-digit yields,” Thozet said.

“But the valuation of risk assets is moving higher, as illustrated by the risk premium for some high-yield segments hovering around levels similar to those seen before the invasion of Ukraine. Or by the level of Italian yields which are at their lowest level compared to Germany since the emergence of the euro debt crisis of 2010. The tightness of spreads in those two markets allows for the integration of protection at a reasonable price,” he added.

Economic outlook
Prior to the shock of the second trade war, the global economy was on a modest recovery path. Now, assuming a durable US tariff spike of 15 per cent, Raphaël Gallardo, chief economist at Carmignac, estimates that global growth will be trimmed by 0.5 per cent (US -1.0 per cent, China -0.5 per cent, Euro area -0.4 per cent) down to 2.4 per cent in the coming 12 months.

“In the US, the drop in consumer and business confidence already portends a sharp slowdown in private domestic demand. The labour market should reflect this ebbing of “animal spirits” as soon as the third quarter of 2025,” Gallardo said. “The incipient deflation in new home prices will also reduce the tailwind of housing market wealth effects. And for low-income households, the rise in default rates on consumer debt suggests all savings buffers have been exhausted.”

“Unlike the previous slowdown, this soft patch cannot be smoothed by a proactive Fed and an easing of borrowing conditions on the long end of the curve. Indeed, the persistence of above-target inflation will force the Fed to be abnormally reactive,” Gallardo continued. And US President Donald Trump’s threats on its independence mean that chair Powell will be inclined to keep delaying the next rate cut.

Stimulus on the cards for China
China had a decent first half thanks to the fresh stimulus injected since September 2024. But there are signs that the durable goods trade-in programme is running out of steam. More stimulus will be needed by the autumn. Gallardo still expects to see only an incremental dose of cyclical support from fiscal and monetary authorities.

“For now, there are no signs that the leadership is contemplating a fundamental change to the current techno-mercantilist predatory growth regime. The targeted liquidity measures have stabilised home prices in tier-one cities, which reduces the drag from negative wealth effects on consumption, and the urgency to reverse domestic deflationary pressures,” Gallardo said. And Chinese President Xi Jinping has used his leverage over critical segments of high-tech supply chains to force Trump into a trade truce with tariffs capped at around 40 per cent. Gallardo assesses that the cost of these new tariffs will be around 0.5 per cent of GDP, therefore manageable with another targeted consumer subsidy programme.

Europe marches on
In the euro area, Gallardo believes that the recovery is delayed, not derailed by the trade war. The new US (dis)order, means a redistribution of growth to the rest of the world. Europe will gain fiscal space. “It is heavily incentivised to spend on de-risking supply chains and export routes away from the US, from re-creating an independent military complex to building new commodity infrastructures and digital infrastructures,” Gallardo said.

“Labour market developments will be the key swing factor in how the region prospers. Corporate profits, have been squeezed by high real rates and labour hoarding. This could test the employment resilience and thus endanger the domestic demand recovery story,” he continued. “This is particularly true for France, which has shown a steady deterioration in employment since the second half of last year, a trend that could accelerate with the unprecedented required fiscal adjustment.”

Despite the risk of an inflation undershoot on the back of a four-dimension shock (euro strength, energy deflation, tariffs and trade diversion), at its June meeting, the ECB revealed an aversion to test the range of neutral rates. Gallardo still expects another cut in September, but the bar for monetary easing has been raised.

Currency markets
“The dollar smile by which the dollars performs best both when the US economy grows fast or when recessionary fears are mounting is turning into a dollar smirk,” Thozet said. “Meaning the ‘safe haven’ status of the US is being eroded and the strike price of the dollar curve is lower than where it used to be. Not a good omen would say the pessimist. But the optimist says this should be beneficial for other currencies.”

His negative view on the dollar is expressed via a barbell strategy. On the one hand, the euro and Japanese yen (more defensive assets) which should benefit from further repatriation of assets away from the US or the increasing hedging of currency risk.

“Indeed, Europe has huge levels of savings and is massively overweight US assets (with 50 per cent or so of invested portfolios in dollar denominated assets) and mostly unhedged. An unwinding, or merely a reallocation to European assets could well send the euro/dollar to the 1.18 to 1.20 range. And on the other, the Brazilian real and Chilean peso (more cyclical currencies) where the well oriented global trade balances should be boosted by the appetite for the real assets these countries produce.

“Copper stands out and Chile’s trade balance too; it is as strong as it was in the 2000s when China was encouraging home ownership and its real estate sector grew to be the largest in the world,” Thozet continued. “Besides, the upcoming political cycle could see a shift towards more conservatives candidates and hence more orthodoxy or market-friendly policies.”