Diverging Policies and Inflation Drive 2025 Global Market Rotation

Reposition portfolios for 2025 as diverging central bank policies, sticky inflation, and rising geopolitical risks drive sharp rotations across global assets. Capture upside from undervalued emerging market tech equities, high-yielding EM bonds, and SGD-hedged gold ETFs—while managing risk with selective eurozone duration, defensive U.S. stocks, and resilient Asia credit.

Key Points

• In 2025, strong double-digit equity returns in Latin America, China, and South Korea, attractive EM valuations (KOSPI and Hang Seng China Enterprises at P/Es of 10.0 and 10.1 vs. MSCI AC World’s 19.3), divergent monetary policies, and persistent global uncertainty support overweight positions in Chinese AI, European equities, Asia ex-Japan markets, and South Africa, while favoring defensive high-quality U.S. stocks.
  
  
• EM bonds gained 3.7% YTD, ECB rate cuts increased Bund appeal, South African bonds signaled fiscal consolidation, U.S. yields rose on inflation and fiscal risk, and Asia credit stayed resilient with high yields, compressed spreads, and low issuance, supporting overweight positions in eurozone duration, EM local debt, and IG credit in Europe and Asia while favoring short-dated or floating-rate U.S. Treasuries.
  
  
• USD/SGD remains volatile on rising U.S. CPI expectations, EUR/SGD is steady after ECB’s eighth rate cut and 1.9% inflation, INR/SGD weakened after a 50bps cut to 5.50%, CNY/SGD may strengthen on a projected USD 100.6bn trade surplus, and BRL/SGD faces pressure from a PMI drop to 49.4, as USD strength is supported by tariff-driven inflation, Eurozone easing reflects 1.9% HICP, India’s 3.0% CPI outlook enables further INR weakness, Mexico’s PMI at 46.7 increases FX risk, and near-term USD and CNY strength contrasts with weaker prospects for INR and BRL amid monetary easing and soft macro data.
  ​
  
• Gold surpassed USD 3,300/oz with rising volatility (13% to 17%) and USD 2.8bn in ETF inflows, as Indian and Chinese imports rose 27% and 19% YoY, the SGD-gold correlation turned briefly positive, tariffs and Fed caution boosted inflation hedging, Taiwan tensions drove safe-haven flows, Q1 central bank buying hit 290 tons, copper and Brent fell 5%+, and SGD-hedged gold ETFs, silver (+18% YTD), and Australian miners like Newcrest (12% earnings upgrade) are preferred over base metals and agriculture facing output or inventory risks.

Download the Full Report

​Integrate key insights into a holistic strategy for your company.

inv250608_-_diverging_policies_and_inflation_drive_2025_global_market_rotation.pdf
File Size:	791 kb
File Type:	pdf

Download File

---

Emerging market and European equities lead 2025 gains amid tech momentum, undervaluation, and supportive monetary policy

Emerging market tech momentum and fiscal tailwinds drive 2025 equity outperformance
​
Emerging market equities have performed well in 2025, with Latin America, China, and South Korea delivering strong double-digit returns.
 
This reflects relative strength driven by a weaker USD, local policy support, and sector-specific catalysts.
 
In China, profit growth is led by internet companies and e-platforms, with AI adoption accelerating in areas like electric vehicles and humanoid robotics.
 
Asia ex-Japan equities are up +10.5% year-to-date, while European equities have surged +22.6% YTD, benefiting from ECB rate cuts and improved fiscal dynamics.
 
Valuation differentials remain pronounced, with the MSCI AC World Index at a forward P/E of 19.3, versus 10.1 for Hang Seng China Enterprises and 10.0 for KOSPI, supporting rotation into undervalued high-growth markets.
 
Tariffs, inflation, and diverging monetary policy widen global equity dispersion

Equity markets continue to face pressure from U.S. tariffs, which act as a supply shock by sustaining core goods inflation.
 
Fiscal fragility and elevated inflation have limited the Fed’s policy flexibility, keeping it cautious and leaving longer-term yields potentially sticky.
 
In contrast, the ECB has cut rates for the eighth time and retains scope for further easing, underscoring diverging monetary policy paths.
 
Emerging markets exhibit wide performance dispersion, with tariff sensitivity being a key driver—China is outperforming on technology momentum, while India rebounded in Q2 after earlier setbacks.
 
The OECD’s downgrade of global growth forecasts adds to volatility, and although all-in yields remain reasonable, renewed credit spread widening remains a risk under deteriorating fundamentals.
 
Reallocating global equity portfolios toward tech-focused EMs and fiscally supported Europe

Chinese technology and AI equities are recommended for overweight allocation, with firms like DeepSeek pioneering scalable innovation and driving offshore market performance.
 
European equities, particularly in Germany and Spain, are supported by ECB easing and fiscal policy improvements, presenting a macro hedge and re-rating opportunity.
 
Asia ex-Japan markets such as Korea (+17.2% YTD) and Taiwan offer broad sector diversification, fair valuations, and strong tech momentum, with KOSPI trading at a forward P/E of 10.0.
 
South African equities provide reform-driven upside and inflation stability, enhancing their equity and high-yield debt appeal.
 
In developed markets such as the U.S., a defensive allocation toward high-quality companies with strong balance sheets is advised to manage inflation and policy risk.
 

EM and Eurozone bonds outperform on rate cuts, fiscal reform, and stable credit spreads, while U.S. Treasuries lag amid inflation risks

EM bonds outperform as reforms and macro trends drive returns
​
The JPM EMBI Global Index has gained 3.7% YTD and 7.7% over the past year, signaling strong total return performance from EM bonds.
 
Local currency debt, particularly from Latin America and South Africa, benefits from high real yields, dovish monetary pivots, and structural reforms.
 
South African government bonds, for example, continue to offer a high premium over equivalent-maturity swaps, reflecting fiscal prudence and improving budget dynamics that suggest declining long-term yields and rising investor confidence.
 
Eurozone bonds gain as ECB easing contrasts with Fed caution

ECB rate cuts—now in their eighth cycle—have increased the appeal of Bunds and other core eurozone bonds, positioning them as attractive duration plays in downside scenarios.
 
In contrast, U.S. Treasuries are weighed down by sticky inflation and fiscal uncertainty, which have raised concerns over long-term debt sustainability.
 
The Fed’s reluctance to cut rates before Q4 keeps real yields elevated, contributing to yield curve steepening and duration risk in long-dated U.S. bonds.
 
EM central banks pivot supportively while credit markets stabilize

Emerging market central banks are cutting rates amid subdued inflation, reinforcing local bond performance by reducing credit risk and supporting growth.
 
Investment-grade (IG) credit spreads, which widened during April’s volatility, have since recovered and now sit at historically low levels.
 
Asia credit remains particularly resilient, with compressed spreads, low issuance, strong balance-sheet quality, and high all-in yields—making it an attractive, low-duration yield option.
 
Positioning: Overweight eurozone duration and EM debt, underweight long U.S. Treasuries

Overweighting core eurozone duration, such as Bunds, is recommended given their capital appreciation potential, supported by stable inflation and a dovish ECB.
 
EM local currency debt—especially from regions like Latin America and South Africa—offers high real yields, fiscal reform upside, and limited inflation concerns.
 
Investment-grade credit in Europe and Asia continues to deliver reasonable all-in yields with moderate duration risk.
 
In contrast, long-dated U.S. Treasuries should be avoided due to sticky inflation and fiscal concerns; instead, favor shorter maturities or floating-rate instruments.
 
Asia ex-Japan credit provides well-balanced income with low volatility and favorable fundamentals.
 

FX markets show divergence as USD and CNY strengthen on inflation and trade data, while INR and BRL weaken on easing and macro fragility

USD/SGD outlook remains volatile ahead of U.S. CPI and tariff-driven inflation
​
USD/SGD remains volatile ahead of the U.S. CPI release on 11 June, with inflation expected to rise to 2.5% from 2.3%, potentially supporting a hawkish Fed stance and prolonging USD strength. U.S. core goods prices are expected to reflect early signs of higher tariffs, reinforcing near-term resilience in the dollar. Short-term positioning remains favorable due to sticky inflation and resilient PPI growth projected at 0.2% for May, following -0.5% previously.
 
Eurozone inflation and ECB easing support moderate EUR/SGD stability

The ECB’s eighth rate cut and a decline in HICP inflation to 1.9% support eurozone bond performance and capital inflows, keeping EUR/SGD steady. With inflation now below the ECB’s 2% target, continued easing remains likely. Easing services inflation and growth-linked capital rotation offer a modest upside for the euro in the near term.
 
Asia FX diverges: CNY stable, INR pressured by aggressive easing

CNY/SGD may strengthen as China’s May trade surplus is forecast to rise to USD 100.6bn, reinforcing trade-linked stability alongside muted core inflation. INR/SGD weakened following the Reserve Bank of India’s unexpected 50bps rate cut to 5.50%, with CPI projected at 3.0%—well below the 4% target—signaling scope for further easing and continued downward pressure on the rupee.
 
BRL and MXN under pressure from weak macro trends

BRL/SGD faces downside risk as Brazil’s manufacturing PMI dipped to 49.4, entering contraction territory for the first time since end-2023. Simultaneously, MXN/SGD is vulnerable following Mexico’s May PMI fall to 46.7, reflecting shrinking exports and labor reductions, compounding macroeconomic fragility and limiting FX appeal.
 
FX positioning favors USD and CNY, with selective EUR rotation; avoid INR and BRL

SGD-based investors should overweight the USD for its yield advantage and inflation resilience. The CNY offers attractive trade-driven stability, particularly if MAS maintains a firm policy stance. EUR/SGD may benefit from capital rotation into eurozone assets amid easing inflation and ECB policy support. Conversely, INR and BRL present weaker risk-reward profiles due to dovish central banks and deteriorating economic conditions.
 

​Gold surpasses USD 3,300/oz on inflation hedging, ETF inflows, and Asian demand, while silver and Australian miners offer tactical upside

Gold extends gains above USD 3,300/oz on inflation hedge and regional demand
​
Gold prices have surged past USD 3,300/oz, driven by sticky inflation and rising geopolitical uncertainty. This reinforces gold's appeal as a safe-haven asset for SGD-based investors.
 
Implied 3-month volatility on gold options has climbed from 13% to 17% since March. This rise reflects speculative inflows and heightened macro sensitivity.
 
ETF inflows reached USD 2.8bn in the past month—the highest since November 2023—enhancing liquidity and institutional participation.
 
Notably, the usual negative correlation between SGD and gold turned mildly positive in May. Both benefited from MAS policy stability and global risk aversion.
 
Regional demand further supported prices. Indian and Chinese gold imports rose 27% and 19% YoY in April, respectively.
 
Tariff inflation and geopolitical risk reinforce gold's safe-haven appeal

Renewed U.S. tariff announcements have lifted core goods inflation expectations. This has bolstered gold’s role as an inflation hedge, particularly for SGD investors facing imported price pressures.
 
Escalating tensions in the Taiwan Strait triggered safe-haven flows into gold in early June. The Fed’s reluctance to cut rates before Q4 maintains negative real yields, supporting non-yielding assets.
 
Central bank gold purchases totaled 290 tons in Q1 2025. This tightens global supply and raises structural price floors.
 
In contrast, copper and Brent oil declined over 5% in May. This drop was due to soft demand and elevated inventories, underscoring gold’s relative strength amid macro divergence.
 
SGD-hedged gold ETFs, silver, and Australian miners offer tactical and structural upside

SGD-hedged gold ETFs remain the preferred vehicle for Singapore-based investors. They provide tactical entry points amid heightened volatility and six-month high flows.
 
Silver has rallied 18% YTD, supported by industrial and AI-related demand. It offers complementary exposure to gold in diversified portfolios.
 
Industrial metals such as copper, zinc, and aluminum face short-term pressure. This is due to 4–7% MoM inventory increases and mixed Chinese manufacturing output.
 
Agricultural commodities like wheat and soybeans declined 3–4% in May. El Niño risks have moderated, suggesting neutral medium-term prospects.
 
Equity-linked exposure to cost-efficient Australian gold miners offers leveraged returns. Newcrest and Evolution Mining, both of which saw 12% earnings upgrades, are benefiting from a weak AUD and rising margins.