Pulais: The US tariff policy brings new inflationary pressures, maintaining a cautious attitude towards risk assets

According to the Zhitong Finance APP, Thomas Poullaouec, Head of Multi-Asset Solutions for the Asia-Pacific region at Prudential, and his team have released their latest report, outlining global asset allocation views and investment environment outlook. The team stated that U.S. tariff policies are bringing new inflationary pressures, and the Federal Reserve may find itself in a dilemma while balancing its dual mandate, thus maintaining a cautious stance on risk assets and slightly favoring inflation-sensitive assets. In terms of equity allocation, Prudential continues to favor reasonably valued value stocks. Regarding bond allocation, given that U.S. fiscal policies may lead to increased bond supply, thereby putting upward pressure on U.S. interest rates, the team maintains a low allocation to bonds but prefers a higher allocation to short-term inflation-linked bonds.

Tariff policies bring new inflationary pressures, the Federal Reserve may be in a dilemma

Although the Federal Reserve has faced challenges in achieving its dual mandate of full employment and price stability in the past, the current environment may be increasingly tricky. After nearly controlling post-pandemic inflation, the Federal Reserve may be facing a new wave of inflationary pressures brought about by tariff trade policies. These policies may also weigh on economic growth, leading to rising unemployment rates. For Federal Reserve policymakers, who are simultaneously facing political pressure to cut rates, higher prices, lower growth, and rising unemployment rates would be an unfavorable situation.

Currently, the job market remains robust, allowing the Federal Reserve to maintain a wait-and-see attitude. However, this situation may change rapidly. Due to trade policies putting pressure on growth, the market has already bet that authorities may cut rates earlier than expected. Given that the Federal Reserve may find itself in a dilemma while balancing its dual mandate, Prudential maintains a cautious stance on risk assets and slightly favors inflation-sensitive assets.

After U.S. President Trump announced tariff policies on "Liberation Day," the market experienced a week of extreme volatility. Subsequently, the Trump administration seemed to make concessions, announcing a 90-day delay. Investors welcomed this move, hoping that extreme tariff measures were merely part of a negotiation strategy. Recent news reflects that this strategy may be working, as many countries seem to be negotiating with the U.S. There are signs of easing tensions, but the impact on economic growth and the prospects for negotiations remain unclear.

Favor reasonably valued value stocks, Europe has more attractive opportunities

Given that tariffs and trade may pose a drag on economic growth, Prudential holds a lower weight in stocks and a higher weight in cash. Increased policy uncertainty and downward revisions in capital expenditure/earnings expectations may further impact stock market performance.

Regionally, Prudential believes that markets outside the U.S., particularly Europe, present more attractive opportunities due to more appealing local valuations and improved market sentiment supported by increased fiscal spending and central bank easing policies. Due to rising inflation risks, Prudential is increasing the allocation to physical asset stocks to a higher weight to better protect the portfolio from inflation shocks. Prudential has downgraded the allocation to Asian (excluding Japan) stocks to neutral, as the region is one of the primary targets of U.S. retaliatory tariffs, and there is currently no clear solution in sight Maintain a low allocation to bonds, but a higher allocation to short-term inflation-linked bonds

Given that U.S. fiscal policy may lead to an increase in bond supply, thereby putting upward pressure on U.S. interest rates, PIMCO maintains a low allocation to bonds. PIMCO reduces its allocation to fixed income categories with wider spreads and maintains a neutral allocation to high-yield bonds and emerging market U.S. dollar sovereign bonds. Although the fundamentals remain supportive, spreads are more susceptible to fluctuations related to trade policy.

PIMCO has increased its allocation to short-term inflation-linked bonds (TIPS) to a higher weight and increased the proportion of globally investment-grade bonds (hedged) to enhance the portfolio's sensitivity to inflation and reduce the allocation to U.S. duration. It also maintains a higher weight in cash, as cash continues to provide attractive yields and liquidity