Do it yourself

 Continuing from yesterday...(see here)

Rising uncertainties

In the past one year, global economic uncertainties have intensified, contributing to a marked slowdown in growth projections—from around 3.2% in 2024 to 2.3–3.0% in 2025—amid persistent disruptions that have eroded investor confidence and trade flows. This volatility stems from a confluence of interconnected factors, including policy unpredictability, deteriorating fiscal positions worldwide, and escalating geopolitical tensions, which collectively amplify risks of financial instability and reduced productivity. ​

​

Economic policy uncertainty

Economic policy uncertainty (EPU) in the US has surged to levels roughly double its long-term average since 2008, exacerbated by the 2024 presidential election and subsequent shifts toward looser regulation, tax cuts, and aggressive tariffs. These US-centric changes have spiked trade policy uncertainty to record highs in early 2025, prompting front-loaded imports and market volatility, while hindering global investment as firms adopt a "wait-and-see" stance. ​

​

Globally, this unpredictability—compounded by inflation divergence and abrupt financial tightening—has led to capital outflows from emerging markets and a broader erosion of business confidence.​

​

 Worsening fiscal imbalances globally

Fiscal strains have deepened across both advanced and developing economies, driven by post-pandemic debt accumulation, demographic pressures from aging populations, and reduced fiscal buffers amid tepid growth.

In the US, expected fiscal expansion alongside tariffs has fueled concerns over sustainability, while in emerging markets, declining export revenues and aid flows heighten debt distress risks. Least developed countries face particular vulnerability, with growth slowing to 4.1% in 2025 and fiscal space shrinking due to high interest rates and social unrest from cost-of-living crises.  These imbalances threaten medium-term growth, necessitating urgent buffer rebuilding and structural reforms.

Widening Geopolitical Conflicts

Ongoing conflicts in Ukraine, the Middle East, and heightened US-China tensions have fragmented global supply chains, elevated energy and food prices, and introduced unpredictable shocks, ranking state-based armed conflict as the third-highest global risk for 2025.

Geopolitical risks, including cyber espionage, have spiked, disrupting trade (projected to halve to 1.6% growth in 2025), and adding risk premiums to commodities. This fragmentation fosters rival economic blocs, reduces supply capacity, and amplifies inflation, with escalation scenarios potentially driving oil prices 30% above baselines.

Overall, these dynamics signal a shift toward a more shock-prone, low-growth world, underscoring the need for multilateral cooperation to mitigate downside risks and foster resilience. Which unfortunately is not happening. In fact, recent events have highlighted that the global leadership might be progressing in the reverse direction.

The following are some of the noteworthy events giving rise to global uncertainties: Saudi Arab-Pakistan strategic agreement, Israel attacking targets in Qatar; the US demanding possession of Bagram airbase in Afghanistan; Russian jets and drones transgressing into neighboring countries; the US intensifying sanctions on India (penal tariff of 25%, extraordinary fee on H1B petitions; threat to leave Chabahar port in Iran); Iran and threatening other trade partners with sanctions over buying Russian oil; widespread civil unrest in several European countries against immigration policies

Conclusion

·         Uncertainty remains elevated globally, though there is some modest easing in financial / macro uncertainty, but not enough to suggest a return to stable, low-uncertainty conditions.

·         Inflation expectations are creeping up in the short to medium term, especially over 5-year horizons, though not exploding. Uncertainty about inflation is somewhat contained short-term but more diffuse long term.

·         Fiscal deficits (especially in the US) are large and projected to remain so; that is feeding into risk premia and possibly inflation expectations.

·         Market interest rates are sensitive to fiscal imbalance: higher debt projections / deficit forecasts are already pushing up yields / forward rates somewhat.

·         Global asset prices might be diverging, a little too far, from the economic realities, and therefore, remain susceptible to a sudden and sharp correction.

Also read

Dark clouds gathering on the horizon - 1

Continuing from yesterday… (see here)

Investors world over are currently faced by a common challenge, viz., divergence of asset prices from the underlying fundamentals. This is particularly true for the investors in equities, precious metals, and treasuries. Nonetheless, they are staying invested, or even increasing their exposure and/or leverage driven by greed or lack of alternatives.

If you take a note of the macroeconomic fundamentals of the top 10 global economies, you would notice that the growth trajectory of most economies is still lower than 2019 (pre-Covid) levels. Though, the growth rate of some emerging markets, like India and Brazil has recovered to the pre-Covid level, on several other parameters like unemployment, fiscal balance etc. these economies are also still struggling to regain even the pre-Covid momentum.

GDP Growth: Most of the top 10 global economies have recovered from the 2020 contraction, but rates remain below 2019 levels in advanced economies due to higher interest rates and geopolitical tensions. Emerging markets like India and Brazil show stronger rebounds.

Inflation: Global inflation has cooled from post-pandemic peaks but remains above 2019 lows in most cases, influenced by energy prices and supply chain issues.

Unemployment: Rates are generally higher than 2019 peaks in many countries, despite labor market resilience. Unemployment issue is becoming structural in several developed European economies, leading to widespread civil unrest.

Fiscal Deficit: Deficits widened dramatically post-2019 due to pandemic related stimulus spending. The current levels are only slightly improved but remain elevated in all economies except China.

Public Debt-to-GDP: Ratios surged across the board due to stimulus; while some stabilization is underway, levels are 20-50% higher than 2019 in most cases, raising sustainability concerns.

If you compare the macro fundamentals to pre-Covid (2019) levels, you would notice that-

·         GDP growth rate in Japan, India, Italy, and Brazil exceeds 2019, driven by post-pandemic recovery and some structural reforms. Unemployment has fallen in France, Italy, and Brazil but still remains elevated. Fiscal positions in China show modest improvement from consolidation efforts.

·         Advanced economies (e.g., US, Germany, UK) face slower growth and higher inflation than 2019, amid tighter monetary policy. Deficits have widened across nearly all (average +2.5% of GDP), fueled by pandemic legacies and energy shocks. Debt ratios have risen sharply (average +16%), with China and Canada seeing the largest jumps, raising risks of higher interest costs and reduced fiscal space.

·         The world economy has grown cumulatively ~25% since 2019, but unevenly—emerging markets like India lead recovery, while advanced ones grapple with aging populations and high debt. Projections suggest stabilization by 2026 if inflation eases further, but geopolitical risks (e.g., trade tensions) could exacerbate deficits.

The challenge for investors’, therefore, is whether and how to align their portfolios and asset allocation with the underlying fundamentals, in order to (i) hedge against a sudden convergence of asset prices and macroeconomic & corporate fundamentals (crash); (ii) preserve their wealth and (iii) manage to earn a positive rate of return.

Given the euphoric market conditions and FOMO pandemic, it is not an easy challenge to meet. Nonetheless, I am working on my strategy to meet this challenge. Would be happy to receive suggestions from my readers.

It is a common adage amongst the financial market participants that “When America sneezes, the rest of the world catches a cold”. The origin of this belief is the global market turbulence in the aftermath of 1929 Wall Street crash. In the past 100 years, whenever the US economy or markets have faced any serious problem, most of the global economies and markets have witnessed elevated volatility and erosion in asset prices. The prime reason for this correlation of the US economy and markets has been the disproportionately large size of the US economy and markets; dominance of the US dollar in global trade; and over-reliance of emerging markets on the US for investment, development assistance and humanitarian aid.

In the past couple of years, serious concerns have emerged about the sustainability of the US public debt and fiscal deficit. The overall GDP growth has been aligned to the average of the post global financial crisis (GFC) period. The efforts to accelerate growth have not yielded much results.

Since January 2025, when the incumbent President (Mr. Trump) assumed charge, things have been rather volatile. Mr. Trump has presented some radical ideas to tackle the economic problems distressing the US economy. These ideas include renegotiating terms of trade with all the trade partners; drastically reducing the budget for global development assistance and humanitarian aid programs; optimizing the size of US administration; and reducing the US commitment to strategic alliance (e.g., NATO); multilateral institutions including the UN and IMF etc.

The impact of these measures, whenever these are effectively implemented (or abandoned), may be felt in the US economy and markets, as well as the global economy and markets. Till then expect the markets to remain tentative and sideways.

Trump Plan

Notwithstanding the theatrics of Mr. Trump, a method in his madness is conspicuous. As I see it, the primary problem of the US is its unsustainable debt. At last count the US public debt was out US$36trn (appx 123% of its GDP), entailing over US$1trn in annual interest payments.

The conventional way to reduce this debt is to use a judicious mix of —

(i)    Curtailing government expenses;

(ii)   Increasing revenue;

(iii)  Inflating the economy to reduce the value of money

(iv)  Weakening the currency; and

(v)   Lowering the debt servicing cost through lower rates.

Mr. Trump is trying to achieve through tariffs (higher revenue and inflation); lower expenses (reducing the size of government, cutting foreign aid, lower clean energy subsidies, etc.); additional revenue (higher VISA fee, new taxes etc.); weaker USD; and coaxing the Fed to cut rates.

How much success he gets in his endeavor, we will know in the next 6-12 months. For now, I see nothing to worry about whatever is emanating from the US. In the next 12 months, the situation will either be the same or significantly better. I shall stay hopeful, though.