International Tensions: Impacts and Investment Strategies on the US

Uncertainty, concerns and high valuations of many US stocks are leading institutional investors to diversify into Europe and emerging markets (recovering with the weak dollar). Like Andrew Lake, Chief Investment officer at Mirabaud Asset Management, who points to Europe's increased credibility as a geopolitical and economic counterweight to the US and the ECB's more favourable monetary policy for EU bonds. Or like César Pérez Ruiz, Head of investments & Cio at Pictet Wealth Management, who declares less exposure to US equities and bonds because there is a lack of confirmation on growth and inflation. Or, again, like Arif Husain, Head and Cio of fixed income at T. Rowe Price, who thinks that in the second half of 2025 the long-term negative factors weighing on the US dollar will prevail and start a structurally negative trend for the currency that could last for years.

Not everyone is so pessimistic, and US financial assets remain the driving force in global markets at the moment, as the advisors we asked for their views on investing overseas tell us in the articles opposite.

Less US and more diversification. This is the advice to investors from Marco Galli of Mg Advisory.

10% Treasury

Galli agrees that Treasuries have always been a key component of bond portfolios because they are considered safe haven assets due to the creditworthiness of the US. However, the US administration's recent announcements on the federal budget and trade policy undermine their international credibility and there are fears that they could fuel rising inflation and interest rates and make it difficult to finance government debt. In addition, the approach of confrontation rather than cooperation with other countries adds to the confusion. "Considering," says Galli, "that in a portfolio perspective the bond component mainly has the function of stabilisation, in the current context I would limit the weight of Treasuries to a maximum of 10% and prefer reduced duration (1-3 years), in favour of less volatile instruments that are better suited to performing this function".

For the equity part of the portfolio, Galli's suggestion for dealing with an unknown scenario is diversification: "I would reduce the concentration in US equities, keeping them at 40-45% of the portfolio (compared to 71% for the Msci World index). At the same time, I would increase exposure to Europe and emerging countries, which have more attractive valuations". An economic slowdown would mainly penalise stocks with valuations that are justified if earnings growth remains robust and continuous. "I would decrease," Galli continues, "the weighting of these stocks and, in general, of the sectors that are most vulnerable to tariffs and trade tensions, such as consumer discretionary, cars, luxury, and highly valued technology. Instead, I would favour more defensive sectors, such as consumer staples, infrastructure and utilities, especially companies with significant and stable profits and cash flows'.

The choice of exposing oneself to dollar fluctuations depends on the objectives and timing of the investment: 'From a long-term perspective,' Galli concludes, 'the weakness of the dollar may not be a problem. If the dollar investment is to finance a future expenditure in a different currency, it is advisable to hedge the exchange rate risk, always assessing the burden. If, on the other hand, the investment is part of a portfolio with a long-term growth objective, hedging the exchange rate risk is not necessary, in light of the exchange rate fluctuations over the long term and the cost of the transaction'.

Linda Leodari, a self-employed consultant, prefers not to include Treasuries in her clients' portfolios because they are volatile and expose them to dollar risk. Instead, her global approach to equities necessarily involves exposure to the US stock market.

'In my investment strategy,' Leodari explains, 'I consider Treasuries too sensitive to volatility because of their long maturities. In addition, a possible further devaluation of the dollar can also have a very negative impact on their yield. Therefore, I do not consider them as instruments in which to invest, even with currency hedging. Generally, in the prudent bond part of long-term portfolios, I prefer European government bonds, with maturities indicatively between 4-6 years. Rather, I prefer to take risk in equities or high-yield bonds, where the returns are potentially higher.

Leodari's equity strategy follows a global geographic approach and, therefore, a large portion of the portfolio is invested in US companies, with a focus on technology, which moves the world: 'For the equity part of the long-term portfolios, I use a geographic approach based on the Msci All Country World index, in which I confirm the high weighting of the US. The part dedicated to sector instruments is limited, with a preference for technology. I believe, in fact, that the engine of growth and technological development is still in the United States. At most, I may slightly overweight Europe, given the recent shift towards the possibility of more debt, albeit mainly for defence. In Europe, however, I still do not see a significant shift towards common debt and a single capital market, and there are costly limits to expansion imposed by an elephantine bureaucracy'.

'I do not use currency hedging for equities,' Leodari concludes. 'Over a long-term time horizon, I have found that its cost risks penalising returns. Currently, the euro-dollar exchange rate is still in the fluctuation range of the last 15 years. The only part of the portfolio for which I use currency hedging is the globally diversified corporate (corporate) bonds. For the remaining part of investment grade corporate bonds (safer, ed.) I prefer ETFs with euro securities.

Also according to Renato Viero of Rv Capital Parners, there is no point in chasing the exchange rate, which is unpredictable: 'When the euro-dollar is in a trend that is favourable to us (as in 2024), I recommend leaving the exchange rate uncovered. If, on the other hand, the trend is potentially unfavourable, as it is now, I suggest the use of at least partially hedged ETFs. From a theoretical point of view, then, in the long term the exchange rate of risky investments, such as equities and commodities, could remain unhedged, while it would be advisable to hedge the free-risk component of the portfolio, i.e. the government bond component'.

Viero's opinion on the advisability of including US financial assets in portfolios is very clear and also partly independent of the current scenario.

To sum up, Viero does not consider it useful to invest in US bonds, because of the exchange rate risk that nullifies the yield differential. US equities, on the other hand, are a must in a global portfolio.

'The rate differential,' Viero explains, 'between US Treasuries and bonds from eurozone countries is certainly attractive, but we have to consider the exchange rate risk. For us euro investors, buying Treasuries in dollars means exposing ourselves to exchange rate volatility, so it's no longer just a government bond, but also a bet on the future trend of the exchange rate, which, having a higher volatility than interest rates, risks becoming the main driver of the Treasury position'.

Viero reiterates that US equities can only remain the predominant part of a diversified global portfolio, which refers to the weight of the US in the Msci World index. 'When,' Viero points out, 'the exchange rate enters an unfavourable trend for us euro investors, we have to consider hedging part of the equity exposure. In local currency terms, US equities have underperformed Europe and China since the start of the year, but it is too early to say whether we are facing the reversal of a trend that has been going on for years. For the time being, US big tech remains dominant in terms of market capitalisation'.

Trump's policies have the merit of accelerating the competitiveness of other countries in various markets.

'The sectors relatively protected from tariffs in the US,' Viero concludes, 'are financials, health care and utilities.