Investment Weekly: US dollar as the key driver of H1 returns

30 June 2025

What can investors expect from markets in the second half of 2025? So far this year, fading US exceptionalism has been a defining feature of the investment landscape. For years, US leadership has been characterised by relatively strong GDP growth, outsized stock market returns, and the strength of the dollar. For markets, it has been dollar weakness in particular, that has influenced returns in the first half – and that looks set to continue.

The H1 headline is that US stocks have underperformed the rest of the world. A weaker dollar, cooling US growth, and higher levels of uncertainty – driven by unpredictable policy – have driven investors to look further afield for superior risk-adjusted returns. That’s seen a switch in equity leadership to Europe, the Far East, and emerging markets (EM), and value outperforming growth. Dollar weakness has created new policy space for EM central banks, with proactive rate cuts – in contrast to a reactive Fed – oxygenating EM bonds and stocks, which have long been under-owned in the era of US exceptionalism. Meanwhile, stronger EM currencies have boosted the appeal of local bonds to global investors.

Meanwhile, a regime of “deficits forever” and a cautious Fed have kept 10-year Treasury yields high in H1, limiting returns and impairing their traditional role in protecting portfolios. Selective credits, real assets and liquid diversifiers like hedge funds and infrastructure have been positive. And the price of gold – a natural haven in uncertainty – has soared.

As pressure builds on risk-adjusted returns, it is important that investors are ready to adapt. Staying nimble and embracing tactical asset allocations will be key to navigating inherently unsettled markets.

Asian stock markets were volatile in the first six months of 2025 – but there were some stellar returns. The MSCI Asia ex-Japan index is up 13% year to date in USD terms, eclipsing US gains. Fading US exceptionalism (especially a weaker dollar) is a catalyst for the rest of the world assets.

A solid performance in China (+19%, USD) was helped by tech sector strength – including advances at AI firm DeepSeek – progress on a US trade deal, and an ongoing policy put.

Meanwhile, South Korea (+32%) set the pace on post-election expectations of fresh policy stimulus and corporate governance reforms, as well as an AI-demand led semiconductor sector recovery. Hong Kong (+18%) was buoyed by lower local rates and a pick-up in trading activity and new listings. And Taiwan posted a 5% gain in H1 but saw a strong pick-up in Q2 largely attributable to FX effects. Overall, some equity analysts continue to see Asia offering broad sector diversification and quality-growth opportunities at reasonable valuations – but selectivity is key.

Year-on-year 2025 eurozone profit growth expectations have fallen to 4% on tariff and currency risk, but it looks set to rise to 11.5% in 2026. Despite the H1 rally, some equity analysts see pockets of exceptional value in wider Europe to keep investors happy.

Looking ahead, senior housing and data centres may also continue to lead the charge in non-traditional segments. Powered by AI, cloud infrastructure, and demographic tailwinds, these areas show sustained rental growth and rising demand. With alternative asset classes playing a key role as portfolio diversifiers, some specialists believe that with careful consideration and a long-term view, investors can find opportunities in a real estate market entering a more balance and income-driven phase.

For markets, increased efficiency could drive corporate profits higher for firms leveraging AI effectively, resulting in upside for equity prices. Meanwhile, bond yields could also see upward pressure amid higher growth that raises demand for capital and pushes r* (the neutral rate) higher. But like all big technological leaps, it won’t be straightforward. Some job losses are likely, while inflation could drop on faster supply growth. Expect this issue to add to uncertainty in the coming years.

Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Diversification does not ensure a profit or protect against loss. Any views expressed were held at the time of preparation and are subject to change without notice. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 7.30am UK time 27 June 2025.

Source: HSBC Asset Management. Data as at 7.30am UK time 27 June 2025. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. 

Easing geopolitical tensions boosted risk markets, with oil prices declining markedly, and the US dollar continued its recent downtrend against major currencies. US Treasury yields fell amid growing Fed rate cut expectations, driven by some dovish remarks from Fed officials and soft macro data, while rising fiscal concerns weighed on German Bunds. Global equities rose, as robust gains in US tech sector propelled the S&P 500 and Nasdaq Composite close to their all-time highs. In Europe, the Euro Stoxx 50 index was on course to post modest gains. In Asia, equity markets saw broad-based advances, led by Japan’s Nikkei 225, with Chinese equities also rallying. In Latin America, Brazil’s Bovespa index traded sideways while Mexico’s IPC closed higher.