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What is a macro portfolio: what to watch for a macro portfolio in 2025

Jan 12, 2025
4 min read
Table of Contents
  • 1. What is a macro portfolio?
  • 2. Could Tariffs Be Non-Inflationary and Harmful to Growth?
  • 3. Key Insights on Tariffs
  • 4. The Impact of a Strong USD
  • 5. Analyzing China's Potential Responses
  • 6. Consensus and Market Expectations
  • 7. Bonds as an Attractive Asset Class

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What is a macro portfolio, as we approach 2025, investors need to consider a macro portfolio strategy that accounts for potential economic shifts, geopolitical risks, and varying asset class performances.
 


What is a macro portfolio?


A macro portfolio is an investment strategy that focuses on broad economic trends and macroeconomic factors to inform asset allocation decisions. Unlike traditional portfolios that may focus on individual stocks or sectors, a macro portfolio considers global economic indicators, geopolitical events, interest rates, inflation, and currency fluctuations to make investment choices.

The primary goal of a macro portfolio is to capitalize on macroeconomic trends and events to achieve above-average returns while managing risk. This approach can be particularly appealing in volatile or uncertain economic environments, where traditional investment strategies may be less effective.


In summary, a macro portfolio is a dynamic investment strategy that leverages economic insights to make informed decisions across a diverse range of assets, aiming for long-term growth and risk mitigation.
 


Could Tariffs Be Non-Inflationary and Harmful to Growth?


What if tariffs end up being non-inflationary while negatively impacting growth? What if Trump prioritizes short-term painful policies in the first half of the year, only to deliver tax cuts in the latter half?

The prevailing consensus may not be prepared for these scenarios.

Let’s explore the concept of "disinflationary tariffs," drawing on insights from Steve Miran, the new Chair of the Council of Economic Advisors.
 


Key Insights on Tariffs


During Trump's previous term, the effective tariff rate on Chinese imports rose by 18%. Concurrently, the US Dollar appreciated by 14% against the Chinese yuan (USD/CNY). This means that the after-tariff price of Chinese goods in USD remained relatively stable. As long as the dollar strengthens, US consumers may not experience significant inflationary pressure from tariffs.

However, it’s important to note that tariffs can negatively impact business sentiment, investment, and overall economic growth. Even if implemented gradually, the underlying message is clear: exporters may need to rethink their business models or cut profits to maintain access to the US market.
 


The Impact of a Strong USD


US dollar holds firm, a strong US Dollar can hinder earnings growth for US companies, which derive about 60% of their revenues from overseas markets. Historical data shows that periods of relentless dollar appreciation have corresponded with weakened earnings growth for US firms.

If countries affected by US tariffs accept currency devaluation without resistance, it’s plausible that tariffs could be non-inflationary but detrimental to growth. However, can we assume that China will not respond?
 


Analyzing China's Potential Responses


Chinese policymakers face three options in response to US tariffs:

Accept the Hit: Allow the CNY to weaken.
Fight Back: Defend the CNY by selling USD reserves and retaliating against the US.
Play the Long Game: Opt for a more measured, strategic approach.
I believe China will likely choose the third option, leveraging its political stability to implement a long-term strategy based on two pillars:

A. Gradual CNY Devaluation with Fiscal Stimulus
China may opt for a controlled devaluation of the yuan while using fiscal stimulus to mitigate any negative impact on the economy.

B. Utilizing "Middlemen" to Circumvent Tariffs
Evidence suggests China has been rerouting goods through neighboring countries to avoid tariffs. Since the first round of tariffs in 2018, Chinese imports to the US have dropped by 5%, while trade from countries like Vietnam, Korea, Thailand, and Malaysia has surged.
 


Consensus and Market Expectations


The consensus currently views tariffs as a major macro event with negative implications primarily for the global economy, while expecting US growth to remain exceptional. However, this outlook may be overly optimistic.

I foresee a scenario where Trump gradually implements tariffs, China successfully dodges many of them through intermediary countries, inflationary pressures remain subdued, but growth slows due to decreased business investments driven by uncertainty.
 


Bonds as an Attractive Asset Class


In this context, bonds could emerge as the most appealing asset class. Our models indicate a 40% implied probability for the Fed to hike rates in the next 12 months, reflecting significant hawkish sentiment priced into the bond market.

With Fed Funds at 4.25% and 10-year yields at 4.60%, bonds present a compelling opportunity, particularly if a strong USD dampens corporate earnings and if the anticipated macro impacts of tariffs are overstated.

In summary, as we navigate 2025, it’s crucial to consider the multifaceted implications of tariffs and their potential impact on asset classes. Join the conversation in the macro investing community for deeper insights and strategies.



When considering shares, indices, forex (foreign exchange) and commodities for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss. 

Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.
 


Risk Warning: this article represents only the author’s views and is for reference only. It does not constitute investment advice or financial guidance, nor does it represent the stance of the Markets.com platform.When considering shares, indices, forex (foreign exchange) and commodities for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss.Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice. Trading cryptocurrency CFDs and spread bets is restricted for all UK retail clients. 

Frances Wang
Written by
Frances Wang
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Table of Contents
  • 1. What is a macro portfolio?
  • 2. Could Tariffs Be Non-Inflationary and Harmful to Growth?
  • 3. Key Insights on Tariffs
  • 4. The Impact of a Strong USD
  • 5. Analyzing China's Potential Responses
  • 6. Consensus and Market Expectations
  • 7. Bonds as an Attractive Asset Class

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