Investing in the Trump Era: Rethinking Asset Allocation

May 2025

This article was written for the Business Post.

Although equities have bounced back and reclaimed their post–Liberation Day losses, institutional investors around the world are now focused on two deeper questions: Are we entering a new regime for investing — and what does that mean for asset allocation?

With over 100 days of Trump 2.0 behind us, a new market paradigm is taking shape. U.S. policy is increasingly focused on an "America First" mercantilist agenda aimed at boosting domestic manufacturing. In response, Europe has been compelled to adapt to a changing global order, increasing both defence and infrastructure spending.

These shifts layer on top of longer-term structural forces: rising government debt, ageing populations, deglobalisation, and the accelerating adoption of AI technologies — all of which are already reshaping the macroeconomic regime.

As a result, institutional investors are re-examining core tenets of their asset allocation frameworks:

What is a safe asset?

The definition of a "safe haven" is being re-evaluated. The U.S. dollar has historically been seen as a safe haven, given its reserve currency status and deep, liquid markets. But with more erratic policymaking, reduced confidence in the U.S., and a growing suspicion that the administration favours a weaker dollar, investors are questioning whether the dollar will continue to offer the same protection during future stress periods.

This matters for euro-based investors. Historically, the dollar has tended to appreciate during market stress, offering a natural hedge on U.S. assets. Now, gold and the Swiss franc are re-emerging as the true haven assets.

What Diversifies Equities?

The role of government bonds in portfolios is also being reconsidered. U.S. Treasuries fell in April even as equities sold off. Between 1980 and 2020, a global disinflationary trend produced a bond bull market and a negative correlation between bonds and equities. Developed market government bonds not only generated reasonable returns, but they could also be relied upon to rise during major equity drawdowns. That relationship is now in question.

First, inflation may require higher interest rates, which can be negative for both bonds and equities (as in 2022). Second, if confidence in U.S. policymaking erodes, investor appetite for U.S. assets broadly might decline. Third, if the U.S. fiscal trajectory continues to deteriorate, one could envisage a vicious cycle of reduced demand for Treasuries and rising bond yields, which could in turn pressure equities.

Rethinking Growth Allocations

On the growth side of the equation, two major investment trends of recent years — U.S. equity dominance and the surge in private markets — are also under review.

Even before Liberation Day, investors were beginning to question whether the era of U.S. exceptionalism was ending. Elevated valuations, concerns over tariffs, and the Deep Seek developments in January all contributed to a weaker outlook for U.S. equities in Q1. At the same time, Germany’s decision to unwind its "debt brake" prompted some investors to reconsider eurozone exposures.

In private markets, the persistent influx of capital into private equity has coincided with a notable slowdown in capital distributions. Higher interest rates have dampened the appeal of leveraged buyouts, and many managers are reluctant to realise losses on assets still marked at optimistic valuations. With limited capital being returned — and many institutions already overweight private markets — some have started selling positions on the secondary market, often at significant discounts. Private credit stakes, for example, have reportedly been trading at 70 cents on the dollar.

Meanwhile, prominent endowments — such as Harvard — have faced funding pressures exacerbated by political decisions, underlining the renewed importance of liquidity. Geopolitical tensions have also caused major Canadian pension funds and Chinese sovereign wealth funds — historically large allocators to U.S. private markets — to pause new commitments.

Implications for Investors:

For investors, a changed macro regime suggests:

1. A need to take a more diversified approach to safe assets — likely a combination of currencies and gold.

2. Although higher bond yields now offer more income, bonds may no longer serve as reliable diversifiers during stress.

3. A more balanced allocation to global equity markets and a greater emphasis on liquidity both make sense at the current juncture.

How this regime shift ultimately plays out will only be known in time. Equity markets have shown resilience since April, but as we saw during the Global Financial Crisis, relief rallies can be fleeting.

The investing landscape is being reshaped — but amid the uncertainty, time-tested principles remain: diversification, robustness, and maintaining liquidity are more important than ever in guiding long-term asset allocation.

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