Asset Allocation Bulletin: Bump and Grind

Regime Change: July 2025

Asset Allocation Bulletin: Bump and Grind

July 2025. by PM

Executive Summary

  • Signs of speculation suggest caution is warranted in the near term
  • Seasonality may support buying some protection
  • Tariff fed inflation has led to a pick-up in prices
  • Our Quad Engine has shifted to a reflationary bias

    • Tariff Talk Tempered

    The markets have regained their composure, and then some, having digested the pyrotechnics witnessed in early April. Becoming increasingly resilient to ‘tariff talk’, investors for the moment appear to be taking the US President’s pronouncements in their stride, as few of the threats seem to ultimately ‘bite’.

    However, there are other factors supporting the significant ramp in equities, bonds and risk assets generally. In particular, the liquidity backdrop, which when measured as a broad measure of the U.S. money supply, rose by 4.5% year-over-year to reach a new record high.

    Liquidity is a measure of the ‘availability of credit’, almost how much oil is in the economic engine and something we pay very close attention to. It can be a significant tailwind for asset prices to move higher and it may remain a supporting pillar of stock markets for some time to come.


    The Year of the ‘W’

    Having anticipated the early year correction, we have been able to profit from the rally. Whilst the most major equity indices move to new highs, there is still scepticism of the move, as many investors have been left behind given the speed of the advance since the April lows.

    It has principally been led by ‘large cap US growth’ or technology stocks again, and in order to continue to gain ground, the ‘average’ share also needs to participate and move higher. However, we anticipate (post a late summer set back), that will be the case. Our Quad Engine, the weathervane which seeks to identify which of the four economic seasons we currently reside in, has signalled a move to the ‘reflationary quad’. This is still a ‘risk on’ environment, meaning there may be further gains ultimately to be had in markets, but just from different pockets of it relative to those which have prospered more recently. More specifically, we would expect to see areas such as emerging markets, mining and commodity stocks potentially begin to lead the way from here.

    The table below shows how equity market sector exposure varies between the four quads:


    Quad 1: Goldilocks Quad 2: Reflation Quad 3: Stagflation Quad 4: Decline
    Growth Rising, inflation falling Growth rising, inflation rising Growth falling, inflation rising Growth falling, inflation falling
    Information Technology Basic materials Commodity related sectors Utilities
    Consumer Discretionary Emerging Markets Real Estate Investment Trusts Healthcare
    Semiconductors Commodity related sectors Infrastructure Consumer Staples

    We track dozens of macro-economic variables daily, to measure whether inflation is rising or falling, as well as to have a handle on the future direction of credit – be it up or down. A combination of those four outcomes, as set out in the table above, determines which of the quad regimes describes best the global economy at that point in time.


    Frothy Coffee

    However, there are emerging signs of speculative excess in this current move, which could cause a shorter term pause. The appetite for more speculative stocks appears to be on the rise, and often a spike in ‘risk appetite’ – either way, be it fear or greed, may precede a reverse in the market’s primary direction. In our current scenario, trading volumes in unprofitable stocks, penny stocks or companies with extremely high valuations are beginning to resemble the conditions we had during 2020 lockdown.

    Moreover, this has all suppressed volatility ( which refers to how steadily the stock market travels without a setback), to historically low levels, just at a point in the calendar when it tends to witness a more volatile period.


    Source: Bloomberg, ARIA
    Copyright of Bloomberg Industry Group. As per the Copyright and Usage Guidelines of Bloomberg Industry Group, data reproduced under limited distribution restrictions and all recipients agree not to further distribute this document.


    New Quad Regime: Reflation

    A high-profile visit from President Trump to the Federal Reserve, and some ‘face time’ with Jerome Powell, the Fed’s President, all sought to put pressure on the US central banking authority to lower rates. Whilst rate cuts are not expected at the July meeting, we find it very difficult to make the case for further easing over the balance of the year either. With the liquidity taps already flowing, and the residual government spend from the Biden infrastructure programs, the US economy has not cracked, displaying remarkable resilience in employment numbers. Furthermore, increasingly visible signs that inflation has bottomed may also constrain the Fed’s hand. The below chart shows evidence of tariffs impacting consumer prices (CPI). This inflation measure is composed of different components, one of them being prices paid in business surveys, and the chart shows historically how a major pick up in output prices has tended to lead consumer prices (the blue line leading the orange one).


    Source: S&P Global PMI, Bureau of Labour Statistics, ARIA.


    Conclusion:

    We had suggested this year may be one that traces out a ‘W’ in shape. At this juncture, we are wary that the air in markets may be a bit thinner here, and reducing stock market exposure is a prudent course of action.

    Easing trade tensions and significant liquidity tailwinds have pushed many markets to new highs. There’s also hope in some quarters, that President Trump may yet travel to China to engage in a negotiation with one of its biggest trading partners. For now though, we believe a truce has been called. China cannot really advance its military ambitions without access to semiconductor chips largely controlled by US firms, and the US’ own military industrial complex is heavily dependent on rare earth minerals, that China exerts significant control over the processing of.

    In light of the above, Navigator portfolios have taken the following action:


  • Sold Information Technology equity exposure (circa 9-11%)
  • Sold Consumer Discretionary equity exposure (circa 9-11%)
  • Bought Volatility ETF insurance protection (between 3-5)%

    • All of these measures are essentially to reduce the stock market exposure of the portfolio, awaiting lower prices to cycle into those sectors which perform best against a more reflationary backdrop – those which can protect margins, and pass on higher input costs and inflationary pressures pick up once more.


    Disclaimer: This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from Aria Capital Management (Europe) or any of its related companies to participate in any of the transactions mentioned herein. This material may contain links to third-party websites or content. These links are provided for your convenience only and do not constitute endorsement or approval by ARIA Capital Management (Europe) and is not responsible for the content of linked third-party websites and does not endorse or guarantee the information, opinions, products, or services offered on these websites. Please review the terms of use and privacy policy of any third-party website you visit. The products managed by ARIA Capital Management (Europe) are typically available via professional advisers rather than individual investors, who should not rely on this information, but contact their financial adviser. This information is not intended to be complete or exhaustive and no representations or warranties, either express or implied, are made regarding the accuracy or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. Please refer to the relevant Prospectus and other relevant documents and/or the terms and conditions for any services offered for detailed information. Past performance does not guarantee future results. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation. Investors should seek financial advice before making any investment decisions. The products and services here may not be available to residents of all jurisdictions. The investments underlying the company and its sub-funds do not take into account the EU criteria for environmentally sustainable economic activities.

    ARIA Capital Management (Europe) Limited is authorised and regulated by the Malta Financial Services Authority, with the Authorised Person ID of FEXS. A Limited Company registered in Malta No: C 26673. ARIA Private Clients is a trading name of ARIA Capital Management (Europe) Limited.

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