Blog post by Empower Wealth

Difficulties and opportunities: VanEck’s 2025 Q3 Summary

Please Note: This report was created and provided by VanEck.

“In the middle of difficulty lies opportunity” – Albert Einstein.

We are in the middle of difficulty. Drafting the quarter’s ViewPoints has been more difficult than in past editions. Why? Because what is influencing markets as we write this may be superseded by something different in a few hours, and then again, a few hours later.

Tariff changes, central bank action, geopolitics, and social media messages have all shifted markets. Most recently, military action and retaliation in Iran. But within this difficulty, there have been, and there remain, pockets of opportunity.

A noticeable trend has been to avoid US and US dollar assets. Returns suggest global markets have been following this wisdom of the crowd, with the US equity market being among the worst-performing this quarter. Smaller US companies are being hit harder than large caps.

The Australian equity market has been one of the best-performing equity markets, but some sectors within the Australian market have experienced negative returns.

The second largest sector, materials, is one notable laggard. Within materials, returns have been disparate.

Gold miners have been among the best performing this quarter. While that sector has thrived, other materials have struggled. Gold miners are associated with being a leveraged play on gold. The theory is that when the gold price rises, its miners rally by more and vice versa. In the recent past, however, this leverage has seemingly only been on the downside. While miners have outperformed the yellow metal this past quarter, we think they still may have more room to run.

It’s not just gold miners. As investors reconsider their US dollar exposure, emerging markets equities, Japan and Europe have become investable alternatives again. What this all points to is opportunity. We think long-term opportunities exist, but taking benchmark approaches could be problematic. A pure MSCI World approach may have too much US. Mega-caps and two sectors dominate the Australian bourse. Opportunities within these markets may be accessed by diversifying elsewhere.

Worryingly, geopolitics in a few different global regions is on the precipice. While this plays out, markets will remain on edge. Participants should also keep a keen eye on fiscal and monetary policies because these can also make or break markets. Where is it all headed?

We’re reminded of an anecdote about John Pierpont Morgan Sr, who was asked what the stock market would do. His reply:

“It will fluctuate.”

Sometimes you just get sticks

It has been a fabulous decade for investors, particularly in US assets. Ever since the recovery from the GFC got underway, “buy the dip” has been an unbeatable equities strategy. At the same time, US bonds have been relatively calm, apart from a necessary re-pricing after COVID, and the US dollar has been unassailed.

However, all good things must come to an end. And while timing the market is usually a mug’s game, there are times when it makes sense to wind back bet sizes. The three biggest signals that it is a good time to wind back risk are:

When you or the market is over-concentrated, then diversifying is your friend.
When you are not getting paid sufficiently to own that risk.
When you face high and rising levels of risk, particularly hard-to-quantify or predict risks.

Considering the first signal, at the broadest level, the world is overweight US assets. Ongoing budget and trade deficits have pushed the US dollar and US debt into the hands of investors all around the world. Furthermore, the prolonged bull market has led the world to be overweight in US equities.

The US economy represents 20% of world GDP, 40% of global corporate profits and 70% of global equity market capitalisation. Furthermore, in countries like Australia, the largest investors in US equities, by and large, have currency hedge levels well below historical norms.

The second signal, the US equity risk premium, is non-existent, as is the inflation premium in US bonds and the risk premium in US credit. The US dollar is well above purchasing power parity (PPP) against most majors. As the old saying goes: valuation isn’t direction, but it is destiny.

Finally, the number of risk factors continues to gather. Tariffs, fiscal policy and debt dynamics, deportations, artificial intelligence (AI) payback scepticism, Ukraine, and the Middle East are all hard to quantify, difficult to predict risks. Every time one recedes, despite the sighs of relief (often only temporary), another pops up.

That is, at this point, you don’t have to be negative on US assets to lighten up on them. You just have to realise you are not getting paid sufficiently to hold them.

So, prudence suggests a better spread of exposures.

Plenty of investors resist the message, of course, mostly based on a variant of “but where’s the market that looks great?” Well, while it’s true that investment is often a game of carrots (attractive bets) and sticks (poor and risky bets) that is not always the case.

Sometimes you just get sticks.

Tariffs

After the tariff moratorium, followed by a Chinese “deal” and an unfavourable court ruling, investors have reacted as if tariffs are now in the rear-view mirror. At risk of being a killjoy, we do not think these factors are definitively resolved.

The Chinese deal is interim, ill-defined and somehow lost in the wave of optimism. Tariff levels are still much higher than a year ago. Cross-Pacific trade has slumped, admittedly from artificially boosted levels as importing businesses front-ran tariffs ahead of the increases.

Most estimates of tariffs on Chinese goods run between 50% and 55%, depending on assumptions, up from around 20% a year ago. Since the first tariffs, China has diversified its trade with the US via third-world countries, many of whom now also face significant tariff hikes.

Furthermore, the tariffs on the rest of the world have been suspended for 90 days, not ended, to allow for negotiations. There have been precious few deals signed. The deal that was concluded with the UK still includes a higher level of tariffs compared to the previous status quo.

The 90 days are up in early July. Perhaps the court ruling against general tariffs will impede its return, or maybe not. The decision is being appealed to a broadly friendly Supreme Court, while a largely supine Congress or specific tariffs could evade the judgment. And that is if the Trump Government doesn’t just ignore it.

One thing Trump 2.0 has shown is that the President is determined to press on with his priorities.

And tariffs are one of them. It would be silly to bet that he will entirely back down, TACO jokes aside. It is hard to know exactly where the tariff roundabout will end. But a few points are clear:

It is hard to know exactly where the tariff roundabout will end. But a few points are clear:

The process will likely end with far higher average tariffs than previous. Many informed analyses point to an endpoint in the high teens, which is roughly three times prior levels and the highest level since at least Smoot-Hawley in the 1930s.
The on-again, off-again uncertainty is drawing out the timeline and preventing business decision-making.
This more drawn-out process is potentially more damaging. This can be seen in FOMC projections (based only on announced tariffs) between March and May where inflation projections rose and stayed higher for longer, with inflation now projected to hit 3% this year and retreat to only 2.4% (still above target) next year. Just because inflation hasn’t picked up yet doesn’t mean it’s not coming

Fiscal outlook

There is less uncertainty around the direction of US fiscal policy. The One Big Beautiful Bill Act (OBBBA) will pass largely intact with limited, but still some, Congressional theatrics and delays.

The uncertainty, however, relates to how much, and for how long, markets will absorb the long-term fiscal impact. Of concern, the US looks set to continue to be running deficits as far as the eye can see, implying increasingly onerous funding requirements. At the same time, the US Government seems intent on alienating allies via tariffs and threats of new investor taxes (section 899 of OBBBA).

Without action, US debt, at 124% of GDP, was already on an unsustainable path.

Initially DOGE reforms were supposed to trim US$2 trillion from future deficits. But by the time Elon Musk left, that number was down to around US$160 billion and falling fast, a number that is a flea bite next to the scale of the problem.

Indeed, monthly data from US Treasury for May still shows that government outlays continue to be higher than in the corresponding month last year. And, despite higher revenue, the deficit continues to widen.

The OBBBA will only push the deficit wider still, primarily by renewing and making permanent expiring tax cuts. Some have suggested extra tariff revenue could close the gap. But the level of tariffs required to offset the widening deficits would be so high as to cripple the economy. Remember, despite President Trump’s belief, most of the cost of tariffs will hit US consumers and businesses.

Best guesses at tariff levels, alongside likely OBBBA make-up, will mean ongoing deficits north of 5% of GDP (even at full employment) and debt levels between 160% and 200% of GDP. If President Trump pushes on with deportations, that will shrink the labour force and hence the denominator – GDP – and make matters still worse.

Those sorts of numbers are dramatically large even for a small-medium economy. For one of the world’s largest it represents an implausible call on global savings.