Markets are adjusting to a major turn in the political consensus

WE'VE had a dramatic start to the year — DeepSeek’s disruption of the artificial intelligence (AI) narrative, a seismic shift in defence and infrastructure spending out of Germany and of course “Liberation Day”.

- JOHANNA KYRKLUND

As a result, we initially witnessed significant divergence in performance across and within asset classes and, more recently, a severe correction.

As always, we need to take a step back to gain some perspective. We've talked a lot in recent years about a major shift in the investment regime driven by a rejection of the political consensus which dominated Western policy from the 1990s onwards; a focus on fiscal rectitude combined with loose monetary policy and a highly globalised economy.

The challenge with this model, particularly in the 2010s as interest rates moved to zero or negative and wage growth languished, was that it didn’t work for the majority of people in western democracies. As a consequence, in recent years we have seen the emergence of a new, populist political consensus focused on a more proactive fiscal policy, protectionism and anti-immigration.

This might appear to be a chaotic combination of events but really it's all symptomatic of the major turn in the political consensus that we've outlined. President Trump’s definition of “tariffs” is flawed but he has been clear about his views on international trade for many years. We might not like his framework and his philosophy, but his policies have been consistent.

Tariffs: basis for pricing risk is becoming clear

Certainly, Trump's opening salvo pointed to higher tariffs than we were expecting. It remains to be seen what the outcome of negotiations will be. However, our economic forecasts are being adjusted downwards and the risk of recession has increased as companies cope with the disruption to their supply chains.