Sharecafe

Trim Capital: Asset Allocation Strategy – Issue 002

Thumbnail
Navigating market headwinds with defensive tilt in 2Q25

Trim Capital’s latest asset allocation strategy, published 6 May 2025, urges investors to brace for near-term volatility as global markets face pressure from escalating US tariffs, mounting policy uncertainty, and tightening financial conditions.

 

Three arrows of economic risk

 

The report identifies three converging forces—labelled “arrows”—as central to downside risks:

 

  1. Direct tariff impacts, estimated to shave 1.5% off US GDP over the next year.
  2. Heightened uncertainty, which delays business and consumer decisions and could exert greater drag the longer trade negotiations linger.
  3. Tighter financial conditions, which could lead to falling equities, rising bond yields, and a weakening US dollar.

 

Trim warns that unless the US administration reverses course or economic pain forces change, recession risks remain elevated. The labour market is already showing signs of softening, with rising job cuts and weakening ISM employment metrics. While high-frequency indicators still reflect some resilience, forward-looking data suggest fragility is growing.

 

Fed response may lag

 

While markets are pricing in an 85bp rate cut from the US Federal Reserve, Trim argues that the Fed’s response is likely to be delayed. The difficulty of modelling supply- and demand-side shocks caused by trade policy makes it hard for policymakers to act pre-emptively. Complicating matters further, President Trump has already pressured the Fed to act, raising concerns about central bank independence.

 

A more extreme risk scenario—labelled the “dethroning of the US dollar”—could trigger a sharper bond sell-off and wider credit spreads. While not Trim’s base case, this possibility adds urgency to their call for greater portfolio protection.

 

Asset allocation outlook

 

To mitigate risks, Trim recommends:

 

  • Modestly underweighting US and Australian equities
  • Overweighting defensive assets such as infrastructure, property, and sovereign bonds
  • Favouring diversification, including Japanese and European equities as upside hedges
  • Positioning in Australian government bonds, which could outperform US Treasuries due to the RBA’s greater rate-cutting capacity

 

The US dollar remains under structural pressure, though near-term downside is cushioned by the Fed’s flexibility. Still, the report underscores time as the critical factor—both for the policy response and the economy’s ability to absorb shock.

 

To read the full report, click here.

Serving up fresh finance news, marker movers & expertise.
LinkedIn
Email
X

All Categories